Many first time buyers are still struggling to secure a mortgage deal. There are a number of reasons for this.
The main factor affecting mortgage availability for first time buyers stems from the lending problems faced by lenders over the last few years. Prior to 2007 many lenders offered mortgages to first time buyers which represented a high proportion of the value of the property, and in some cases 100% loans were available. Unfortunately lenders have lost money on these loans as the credit crunch has caused many borrowers to have financial problems; arrears and repossessions are up and house values have fallen.
Additionally, many mortgages were arranged on an ‘interest only’ basis meaning the debts have not reduced. Add to this the fact that lenders gave mortgages to many who could barely afford them anyway, and you have a recipe for major problems for the lenders.
So lending criteria have tightened up – a lot. Lenders want to avoid what they see as ‘risky’ mortgage lending and have taken steps to avoid attracting such business. These are some of the problems restrictive lending policies causes first time buyers:
- You are a greater risk because you have not had chance to establish a lengthy track record of sensible financial management.
- The possibility of house price reductions means lenders need you to put down a large deposit – often 10% or more of the price of the home. This is not easy, especially where you are already renting before trying to buy. If you fancy a nice new-build flat or apartment, high ‘loan to value’ mortgages are only available where someone offers the mortgage lender some additional security in case their loan goes wrong – such as builder deposits, guarantee funds, or Government backed Help To Buy schemes.
- Houses are extremely expensive! And there is always the possibility that the house you buy will be worth less than you paid for it when you come to sell. This possibility is putting many first time buyers off.
- Some first time buyers present their bank statements as part of the application process which show repeated use of the new ‘Payday’ loans. These are relatively small loans taken for a very short term, often up to 30 days or so, but which are charged very high rates of interest. However, whatever the reasons for which they are taken out, all the lenders see is an inability to meet the applicant’s liabilities from their own income, and most will therefore decline to lend on mortgage. Paydays loans should only be used as a ‘last resort’ and only after other alternatives such as a bank overdraft or family loan have been explored.
- The Financial Conduct Authority (FCA), who regulates the market, insists lenders are more prudent in the amounts they lend, so they will now more carefully consider whether a mortgage proposition is affordable and will require accurate budgeting information to do this.
- The FCA has also recommended to lenders that they restrict lending on an interest only basis, whereby no capital is payable off the loan. Whilst this is not necessarily a bad thing for first time buyers, preventing the storing up of problems for later, it means that many cannot afford the full capital and interest repayments.
- Any first time buyers with a less than exemplary financial record, or a provable history of addresses in recent years may struggle even more. If you are thinking of getting a first time buyer mortgage make sure you are registered on the Electoral Register for the home you now live in, and do not miss or make late credit card and loan repayments.
- For many first time buyers though the real problem is the deposit. Unless the Bank of Mum & Dad is open for business, or Grandma and Grandad are able to gift an early inheritance, many first timers will not be able to buy until lending restrictions on maximum loans ease up.
The Mortgage Market Review, conducted by the Financial Conduct Authority, came into force on 26 April 2014 and requires lenders to make even more stringent affordability checks, and apply ‘stress testing’ to assess the effect of higher interest rates and their impact on the borrowers. The new lending policies will only serve to make things even harder for first time buyers, even if the changes introduced may be regarded as prudent.
So what can you do to improve your chances of getting a mortgage?
- Keep your nose clean financially – no late or missed payments to credit agreements, pay your mortgage or rent on time and in full and NEVER use Payday loans – they appear on your bank statements and suggest to mortgage lenders that you cannot manage financially. Check your credit report to see what the lenders will be told about you by requesting a copy from any of the leading credit referencing agencies – Equifax or Experian – for just £2. Click on the ‘Statutory Credit Report’ link on their front pages of their websites.
- If you run an overdraft on your bank account, it is best to not have items like ‘Lottery’ or online gambling debits showing up on the statements!
- Get yourself on the Electoral Register (Voters Roll) with your local council. Lenders like to see a history of where you have lived. Don’t assume that if you pay Council Tax at your home that you are automatically placed on the Electoral Register; you aren’t.
- Save a deposit in an account in your name. If the Bank of Mum and Dad are helping you financially, get the money into your account at the earliest opportunity.
- Keep all of your payslips and annual P60, plus all of you bank statements. Lenders like to see your regular income and where it goes. Internet statements can be a problem if they do not show your name, address and account numbers – which many don’t.
- If you have had bad credit in the past and had a default notice or County Court Judgement, get it paid off. ‘Satisfied’ debt problems do not look as bad as ‘live’ ones.
A competent and experienced mortgage broker such as Andy Wilson will be well placed to find you the most suitable first time buyer mortgage given your particular circumstances. If you really stand no chance at all, they should be honest and tell you so, but also tell you what to do to improve your chances later. Otherwise, with the market as it is you could spend many hours trawling the various lenders on your own to find someone who will lend.
You can contact Andy Wilson using the form below, and to ask any questions or to arrange a no-obligation meeting. All initial meetings are at Andy’s expense, not yours.