It’s the resolution making time of year and many young people would have woken bleary-eyed into the New Year determined that 2007 be the year they get a foothold on the property ladder. On the face of it, however, the chances of achieving this might seem slim to would-be first-time buyers (FTBs). Warnings, such as the one made by the Halifax on the eve of the New Year, of rising housing costs ruling FTBs out of the market altogether, hardly inspire confidence.
It can’t be denied that conditions are tough for FTBs: the recent surge in house prices act as a major deterrent. After a brief blip in 2005, growth in house prices continued apace last year as average house prices rose year-on-year by 10.5 per cent in 2006. According to recent research from HBOS and the CML, average house prices now stand at 6.1 times average income.
Predictions on what will happen to house prices in the year to come offer little comfort to first time buyers either, with most commentators agreed that house prices will continue to grow at rates between four and eight per cent in 2007. Moreover, the Bank of England has raised base interest rates again in January to 5.25 per cent, following last year’s rises in August and November.
For all young people, and particularly those burdened with student loans, bank overdrafts and credit card debt, these economic conditions might seem to rule out the possibility of becoming a homeowner in 2007.
Yet these same people often manage to afford rent payments in excess of what a traditional income multiples calculation would recommend. A recent report by the Joseph Rowntree Foundation (JRF), for instance, has shown that across 51 areas of the UK, more than two in five younger workers had incomes sufficient to pay a social rent without relying on housing benefit, but still couldn’t afford to buy at the lowest house prices.
While the report suggests that people move to areas with lower house prices, as many young people will testify to, this isn’t always practical, desirable or even possible. More often than not people are tied to the area in which they already live by family or work. In this situation, moving to a cheaper area isn’t a viable option.
Recently, aspirant FTBs such as these have been helped in such situations by debt-to-income (DTI) based “affordability” products, which can offer new buyers a leg-up onto the property ladder. Affordability calculations work out the amount a customer can pay based on what they can afford each month rather than what they earn.
Originally conceived as a product for customers with good credit histories, this approach to lending – which gives a clearer assessment of the amount a customer can afford to borrow – is now also available to those who have experienced financial difficulties in the past, and who may well still have outstanding debts to repay.
A growing contingent of non-conforming lenders have recently replaced income multiples with affordability calculations in order to offer a more flexible approach and individual assessment of lending capacity. At SPML we made the change in November, introducing a top level DTI ratio of 53 per cent, with no sliding scale applicable to the size of actual incomes. An affordability service can be tailored to suit the non-conforming sector, with affordability calculations considering an individual customer’s debt history, lifestyle, outgoings and existing debt. This key information gives the intermediary a far clearer picture of exactly who they’re dealing with and ensures that customers are offered the right product for their needs.
In the past, intermediaries have been put off using affordability sums because of the long processing times associated with the procedure. Industry innovations have remedied these problems now though. Now intermediaries have access to online affordability calculators which assess an applicant’s ability to make repayments within minutes. After inputting the customer’s key financial data, an intermediary will instantaneously be presented with the potential borrowing capacity of the customer.
So despite what many young renters may think, becoming a homeowner in 2007 is one resolution they can stick to. Unfortunately, not enough young people seem aware of all the options available to them. The problem is one of perception.
Many borrowers are simply unaware of the DTI ratio method of assessing affordability and still think they can only borrow maximum amounts determined by income multiple methods.
The introduction of affordability calculations offers a new business opportunity for intermediaries to promote the benefits of affordability-based lending to borrowers who believe that they are unable to get on the property ladder. Awareness needs to be increased, and the spotlight is on mortgage intermediaries to do just this.
