While first-time buyers have always relied on the advice of brokers to guide them through the maze of mortgage products on offer, brokers should soon expect them to knock on their doors with a new set of concerns. Anyone wanting to get onto the property ladder today would be justified in feeling caught in a web of conflicting anxieties. On the one hand, the urge to jump on the property bandwagon for fear of facing a continuous rise in property prices and risk being left stranded for years to come, and on the other, the nervousness of borrowing in a way the media has at times branded ‘dangerous’, with some experts warning of a potential slump in property prices.
We have all read the Financial Services Authority’s (FSA) request for lenders to ‘stress test’ their models to ensure that borrowers could cope in circumstances as extreme as a 40 per cent crash in property value. Brokers and lenders must not ignore this appeal. The industry cannot keeps its ears covered, if only because it needs to answer the questions this has raised among clients.
Addressing client concern
In order to address clients’ concerns, it is no longer sufficient for brokers to stress the difference between fixed, discounted, variable and capped mortgage rates, penalties and costs of products. It is crucial that they delve deeper into the options offered by the market, helping their clients select the lending model best suited to their personal circumstances.
For first-time buyers, making the first step on the property ladder can be laden with fear. It needn’t be, but should certainly be a step taken responsibly. Intermediaries have tools to reassure their clients. They can steer them towards a product they can afford both today and tomorrow.
The salary multiple model most traditional mortgage products rest upon provides a quick, easy tool for calculating an individual’s ability to service the debt. It is, however, not the most thorough model for taking into account realities. While a lender cannot realistically factor in all the specific details and plans of a potential borrower, it is possible to make reasonable assumptions that cover most circumstances by asking specific information.
At Advantage, our calculations are based on debt to income ratio, and the maximum we currently allow for a plan is 45 per cent up to a loan-to-value of 95 per cent. For fixed and discount rate mortgages, customers will be assessed on their ability to repay the loan throughout its period. We will consider the level of repayments after the discounted, deferred or fixed period has ended. We also ask all customers who wish to take out an interest only mortgage to declare their plans to meet the capital commitments at the end of the term. Our contracts reiterate all the risk warnings already voiced by mortgage intermediaries.
Unless we give enhanced buying power to aid first-time buyers and key workers, it is likely they will be left stranded. A range of competitive products is essential and despite a tough environment for buyers, wouldn’t deterring customers from entering the property market be irresponsible?
Further development
Finally, given the direction taken by the market, it would not be preposterous to believe that specialist, flexible mortgage products are set to take a growing share of the home loans market.
Whatever way you look at it, whichever way property prices and interest rates go, flexible mortgage solutions that can deliver affordable repayments for buyers over time represent the most sustainable lending practise.
When remortgaging is likely to slow down, mortgage intermediaries cannot afford to cut themselves out of the lucrative first-time buyer market. They must strive to ensure that they are able to recommend the right product to all of the clients coming through their door, whatever their personal circumstances, needs and requirements.
As a forward-thinking industry, we should not shy away from adapting to change, but embrace it instead.
Jeremy Duncombe is business development director at Advantage Home Loans
