Sourcing a mortgage deal can be a struggle for first time buyers. There are a number of reasons for this.
The main factors affecting first time buyers stem from the lending problems faced by lenders following the credit crunch. Prior to 2007 many lenders offered mortgages to first time buyers for a high proportion of the property value. In some cases 100% loans were available meaning no deposit was required. Unfortunately, lenders lost money on many of these loans due to redundancies, falling house prices and repossessions.
Additionally, many mortgages were arranged on an ‘interest only’ basis meaning the debts did not reduce. With falling house prices, ‘negative equity’ (where the debt exceeds the house value) quickly followed.
So lending criteria has tightened up – a lot. Lenders want to avoid what they see as ‘risky’ mortgage lending and have taken steps to avoid attracting such business.
So how has this affected first time buyers?
Lenders see first time buyers as a greater risk because they have been unable to establish a record of sensible financial management. For example, some first time buyers even present their bank statements as part of the application process showing repeated use of ‘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 they were taken out, all the lenders see is an inability to meet the applicant’s liabilities from their own income. As such, most will therefore decline to lend on mortgage. The use of Paydays loans should only be done as a ‘last resort’. Check first whether other alternatives such as an overdraft or family loan can be used instead.
The affordability of any new mortgage is paramount to lenders (and, of course, the borrowers). Lenders aim to ascertain that any new loan will remain affordable throughout the term, as far as this is possible. They will therefore check bank statements to see your monthly income and expenditure, and repeated expenses such as loans. They will also question unusual spending patterns or irregular deposits to see if they are sustainable.
You will be asked to complete a monthly budget planner. This aims to ensure you go into a home purchase understanding what all of your monthly costs will be. If you haven’t run a household before, you may not be familiar with insurances, utilities, cost of repairs and so on.
- The possibility of house price reductions means lenders need you to put down a large deposit. Some lenders offer 95% mortgages, but others require a minimum deposit of 10% or more of the price of the home. This is not easy, especially where you are already renting before trying to buy. Unless the Bank of Mum and Dad is open for business, or Grandma and Grandad are able to gift an early inheritance, possibly using Equity Release on their own property, many first timers will not be able to buy until lending restrictions on maximum loans ease up.
- It can be hard to source high ‘loan to value’ (the proportion the mortgage represents of the property value) mortgages. To obtain a ‘95%’ mortgage your financial position needs to be squeaky clean.
- 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 is especially true for new-build properties which come at a premium because they have not been lived in.
- The mortgage Regulator, the Financial Conduct Authority (FCA), has also recommended to lenders that they restrict ‘interest-only’ lending whereby no capital is payable off the loan. Whilst this is not necessarily a bad thing, it means that many cannot afford the full capital and interest repayments.
- Any first time buyers with no provable history of addresses in recent years may struggle even more. Make sure you are registered on the Electoral Register at the Council for the home you now live in.
The Mortgage Market Review
The Financial Services Authority conducted the Mortgage Market Review, which came into force on 26 April 2014. This requires lenders to make even more stringent affordability checks, and apply ‘stress testing’ to new mortgages. This testing assesses the effect of higher interest rates and their financial impact on the borrowers. The revised 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, and NEVER use Payday loans. These appear on your bank statements and suggest to mortgage lenders that you cannot manage financially.
- Check to see what the lenders will be told about your credit file. Request a copy from any of the leading credit referencing agencies – Equifax or Experian – for free. Click on the ‘Statutory Credit Report’ link on the front pages of their websites.
- If you use an overdraft on your bank account, it is best not to have items like ‘Lottery’, ‘SkyBet’, ‘BetFred’ or other online gambling debits showing up on the statements! Lenders definitely do not like you gambling with borrowed money!
- Get yourself on the Electoral Register (Voters Roll) with your local Council. Lenders like to see a history of where you have lived and been registered to vote as it suggests stability. 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 your bank statements. Lenders like to see your regular income and how it gets spent. 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.
We can help!
We can help you to find you the most suitable first time buyer mortgage given your particular circumstances. If you really stand no chance at all, we will be honest and tell you so, but also tell you what to do to improve your chances later. Otherwise, you may spend many hours trawling the various lenders on your own to find someone who will lend.
You can contact us to ask any questions or arrange a no-obligation meeting using the form below. All initial meetings are at our expense, not yours.