New study shows first-time buyers poor knowledge of the process
The managing director of a brokerage says he is shocked by the results of its new study, which suggests that first-time buyers have a worrying knowledge gap about mortgages.
Gerard Boon, who heads up Boon Brokers, is concerned that those buying their first properties risk gambling with their financial futures and making crippling decisions, after the firm’s survey of a thousand first-time buyers, of all ages, found that 97% did not learn about mortgages at school. He is urging that a new GCSE in financial studies becomes part of the curriculum.
“We were horrified by the results,” Boon told Mortgage Introducer. “It confirms that the vast majority of first-time buyers are entering the mortgage market blind, without sufficient knowledge to make informed decisions about their mortgage selection. Sadly, we were expecting a lack of knowledge from participants prior to conducting the research. Our advisers at Boon Brokers frequently comment on the lack of mortgage knowledge from first-time buyers, especially around the mortgage process. This research is very worrying. If first-time buyers do not understand the basics of mortgages, they are vulnerable to making ill-informed decisions. For example, the research clearly shows that 82% of first-time buyers do not understand the adverse impact of a late payment on their credit files. It could result in higher interest rates offered by lenders, and therefore higher mortgage payments, for six years, until it is removed from their file.”
The research shows that 84% of respondents don’t know how to achieve the best interest rates, and 93% of respondents don’t understand what size deposit is needed to secure the best rates. Boon believes that young people should receive a basic level of education around mortgages and other significant credit commitments during their education. This would ideally be at GCSE level as a mandatory subject, perhaps coined – he suggests - as financial studies. “This could prevent thousands of young people across the country from making poor financial decisions, which they may struggle to resolve for many years,” he said.
Read more: 'The homebuying process is archaic and needs to change'
Do first-time buyers understand the key driver of mortgage rates?
In the study, only 21% of men and 12% of women correctly identified that mortgage rates are affected by loan-to-value ratios. “Loan-to-value is the key driver of mortgage interest rates,” Boon noted. “As a mortgage is the largest financial commitment that most people will ever own, it’s vital that the general public understand what dictates their mortgage payments. Without this knowledge, they may unknowingly agree to a mortgage with a higher interest rate than is necessary.”
Furthermore 23% of respondents admitted to not learning about mortgages from any source, despite being first-time buyers, with the majority learning from their friends and family. This lack of education is not limited to younger generations, it seems. The data highlights that 40% of those aged 55-64, and 50% of those aged over 65, are unaware of how late payments affect their credit files.
“This is, sadly, a sign of the times,” said Boon. “As the research shows, worryingly, all age groups largely rely on the education from their families rather than the education system. This is dangerous as families, despite their best intentions, are often not qualified to give sound financial advice. When we begin to take a holistic view at the sources of education people use to learn, it comes with no surprise that we’re falling into a perpetual circle of misinformation. Now, with the rise of Tik-Tok learning and social media influencers offering quick shorts of both unsolicited and unsanctioned financial advice, concerns are rising that the younger generations are at an increased risk of believing false facts.”
Boon Brokers’ research surveyed respondents from across the four regions of England. While all the research indicates a consistently low mortgage knowledge, respondents from the South West demonstrated a stronger understanding of the mortgage fundamentals, compared to other areas.
Those statistics do not surprise Katie Brown, pictured centre, a broker at The Mortgage Mum. “Unfortunately the financial basics such as opening a bank account are not taught in school, never mind mortgages,” Brown said. “I have notice a trend in clients having late payments or defaults on phone contracts or mail orders from when they were 'younger' which can later cause issues when sourcing a mortgage due to satisfied defaults remaining on the credit file for six years. I do find clients quoting interest rates they've seen online or on the news without understanding they usually are the cheapest available and thus 60% LTV or less which then puts a negative spin on the conversation when discussing the rates available to them.” She added: “In terms of what more needs to be done to improve FTB knowledge I would say guidance in clear terms, not using abbreviations. I pride myself on my socials appealing to the FTB audience by keeping things simple and breaking each stage down step by step.
Brett Walker, (pictured right), a self-employed broker who works with Poole-based BWM Mortgages, said that in his experience, first-time buyers generally fall into two categories. “The first group consists of those who have little knowledge of the mortgage process but recognise the value of expert guidance,” Walker said. “These clients are great to work with. Once given the right information and support, they quickly gain confidence in their decisions. The second group, however, can be more challenging. They come armed with fragmented online research and are often very rate-focused, believing they have more leverage in the market than they actually do. They’ve read about one lender offering over five times’ income, another providing 95% LTV, and yet another advertising a 3.99% fixed rate, without fully understanding the context or criteria behind these figures. Bringing them back to reality can be difficult, as they often have strong preconceptions about what’s available.” Walker added: “If only these ‘unicorn’ deals existed, I’d have a queue out the door!”
