With the demise of 125 per cent and 100 per cent mortgages, first-time buyers are increasingly left with no viable option when it comes to finding a mortgage product.
Although lenders have had no other choice but to remove the high loan-to-values (LTVs), they now need to master a careful balancing act to ensure that this reaction to the credit crunch, while necessary, will not affect the market long after the crisis has eased.
High LTVs have been a lifeline for first-time buyers. By closing the door to this group, as banks retreat to boost their balance sheet, we run the risk of freezing out this crucial group from the market indefinitely.
Stark contrast
In contrast to the first-time buyer market, the buy-to-let market is growing. The rental market remains a solid investment, as potential buyers sit and wait to see what the market does.
Investors who are less heavily geared, with the protection of a strong portfolio behind them and excellent credit ratings have been taking advantage of the fact that they are much more attractive to lenders and are now acquiring what are typically first-time buyer properties.
As more buy-to-let investors fill the gap we could find first-time buyer stock out of circulation all together. These property types would commonly change hands every three or so years, which in turn fuels the demand for properties on the next rung of the ladder. If first-time buyers are prevented from entering the market for too long we could see this buoyancy in the market lost for good.
Resilience
However, this group may be more resilient to the current market than is commonly believed. Following the two drops in interest rates since December, our survey revealed a rise in first-time buyers with the market share steadily increasing by 2.5 per cent since the beginning of the year.
It seems that some first-time buyers have been encouraged by the Monetary Policy Committee’s decisions and have not been put off by the need to put down a larger deposit. It is this sort of confidence which is essential to reignite the property market.
This confidence should be galvanised by lenders. Although 100 per cent or 125 per cent mortgages are unlikely to return to the market soon, more lenders should look to 95 per cent mortgages to help first-time buyers.
Lenders should also start to look at other innovative ways to create first-time buyer opportunities. Without this, it could be a few years after the credit crunch has resolved that we see the next set of applicants.
Emerging products
As a result of the industry adapting to the changing market new products will emerge, as has always happened in previous housing market downturns.
One such emerging product is the 25-year fixed mortgage. Under the backdrop of concerns over the future health of the housing market, Alistair Darling’s favoured product may become a lot more commonplace, as borrowers seeking security opt to budget over the longer term.
Even when the housing market recovers, the fears from this downturn are likely to stick in the minds of borrowers as they choose to pay more for peace of mind.
However, will this long-term option be right for the borrower? For example, if you are dealing with young people whose circumstances are regularly changing, these products, which initially may appear suitable in the short term as borrowers’ security concerns are abated, may actually be unsuitable in the long term.
Quality of service
The current situation will force the industry to innovate with not only the products it offers, but the quality of service it provides. Now more than ever, brokers need to give personalised advice that goes beyond customer satisfaction. This change in culture is likely to have a lasting impact.
We will get through this downturn; the money markets will ease, interest rates will drop further and the mortgage and housing markets will show signs of a pick up.
The industry will undoubtedly evolve and survive through its innovation, as it has always done in the wake of previous housing market downturns. However, we can not afford to lose sight of the long-term view when making the decisions of today.
