With house prices having enjoyed an unprecedented period of growth over the last decade or more, the challenges facing buyers have been well documented.
However, buyers facing affordability problems have been helped by lenders who have increasingly sought to introduce mortgage products to the market that seek to reflect the changing and disparate lifestyles that different people are now leading.
This allows them to offer mortgages that reflect the way that borrowers choose to live their lives and the financial consequences of this.
Talk to anyone above a certain age about mortgages, and they will almost immediately tell you that you can only get a mortgage that is a multiple of your income, and, although it will vary by lender, it will tend to hover at around the 3.5 times salary mark.
Maybe that may have been the case 15 years or so ago, but nowadays, it is possible to borrow much more. Many lenders will offer up to five times salary, and a few will be willing to go as high as six times.
Lenders are able to do this as a consequence of them now having developed sophisticated models which allow them to make a very accurate credit assessment of a mortgage applicant.
At the same time, technology allows the individual financial circumstances of the borrower to be taken into account to a far greater level than before. This means that a mortgage can be tailored to the individual circumstances of the person who is seeking the loan, rather than to a more generalised average.
As a consequence, a dual income couple, with no debts, no children and a modest lifestyle will find that lenders will allow them to borrow more than a couple with one income, a poor credit record and several children. This reflects the greater disposable income that the former couple have compared to the latter family, and that as a consequence they will be able to sustain higher mortgage repayments than their financially burdened counterparts.
The use of affordability calculations like this is becoming widespread, as lenders start to recognise the benefits that it can bring to financially responsible people by allowing them to borrow more than they otherwise would under the cruder ‘income multiple’ techniques. It also recognises that people live much more disparate types of life these days than in the past, and that as a consequence, it is not so easy for a lender to develop a ‘one-size fits all’ approach that meets the requirements of all prospective borrowers.
Giving it 100 per cent
But while this general way of assessing a mortgage applicant’s ability to meet a mortgage commitment has been embraced by many lenders, many have also developed specific products that seek to respond to the particular circumstances that borrowers are facing.
Paramount among these is the 100 per cent mortgage. For many people, and especially first-time buyers, saving for a deposit can be a greater problem than making the mortgage repayment. A BSA survey, for example, found that raising a deposit represented the greatest barrier to potential first-time buyers entering the property market, not, as is often reported, the actual cost of servicing a mortgage after they have bought their property.
After all, in many areas, rents are now considerably greater than an equivalent mortgage payment would be on the property. As a consequence, although the renters of the property could easily meet the mortgage repayment, because they are paying such high rental charges each month, it is impossible to save the often considerable sums that are now required to make a significant house deposit.
However, a 100 per cent mortgage allows such a potential buyer to overcome all of the problems associated with raising a deposit by allowing the buyer the opportunity to purchase without needing a deposit. And some, such as the Coventry Building Society’s ‘Moregage’ product for example, reflect the high costs that are associated with buying a home by providing a loan for up to 125 per cent of the property value, to cover legal, surveying and other costs associated with setting up home.
Recognising that the lifestyles of many first-time buyers prevents them saving for a deposit, a 100 per cent mortgage, or other high loan-to-value product, gives them the opportunity to buy without having to save.
Lending a hand
Lenders have also developed products that reflect an individual’s future earning potential. A number of lenders offer graduate mortgages, which are available to newly qualified graduates or people working in a number of closely defined professions. They are based on the premise that although the borrower may not be earning much in their current job, the accelerated earnings potential of the borrower means that within a short period of time, the borrower will be able to more than cover the costs of the mortgage.
Many of these products are based on the premise that part of the loan is underwritten by a family member and as the applicants income rises, the borrower increasingly takes on responsibility for a greater part of the mortgage until the borrower is responsible for all of the loan.
But even for a non-graduate, allowing a borrower to use either the income or savings of a family member – or sometimes several family members – to help underwrite the mortgage is becoming an increasingly popular way of enabling people to buy.
Norwich and Peterborough Building Society’s ‘Lend a Hand’ scheme, for example, allows a borrower’s parents’ income to be used in the affordability calculation for the loan. This allows the borrower the ability to access greater finance than would otherwise be available, and can be used across the society’s product range. Chelsea’s ‘Helping Hand’ mortgage operates in a similar way, linking a buyer’s income with those of up to three close relatives.
And it is not just families’ income that can be used to help first-timers with their mortgage. Recognising that many people choose to marry much later than before, many lenders will now allow groups of friends to jointly buy a property with a joint mortgage. These so-called ‘mates mortgages’ allow friends to often pool several incomes to obtain the loan that they need for the property that they desire.
Moving with caution
So mortgage lenders are doing what they can to ensure that people, faced with a potentially hostile housing market, have the opportunity to raise the funds that they need to buy a home.
However, while lenders can be proud of what they are doing to help these groups, they also need to move forward with caution.
Although these products provide an important opportunity for people to get a mortgage loan that reflects their lifestyle and their financial circumstances, they also have their critics.
Because so many people view the income multiples of old as sacrosanct, there is a ready market for stories regarding reckless lending by mortgage companies of amounts greater than this.
However, these stories often fail to reflect that these particular mortgages are not given out to just anyone. Borrowers can only get access to such mortgages when they can demonstrate that they have the necessary income to ensure that they will meet the mortgage repayments and that it will genuinely be affordable and not compromise other financial commitments they might have.
To ensure that this is the case, many lenders also tend to require the product interest rate to be fixed for a relatively long period, to ensure that borrowers won’t encounter any sudden rises in mortgage repayments that they can ill afford.
Scaremongering
But these issues are often overlooked by a media anxious for scare stories about dodgy lending practices, and as the continuing levels of media interest in the mortgage market continue, it is likely that many of these products will receive greater attention.
That attention, sadly, will not focus on how lenders are helping to get people onto the housing ladder, but will instead focus on the dangers. Dangers that are known to lenders, and that lenders ensure are mitigated and minimised by the application process and vetting of applicants that takes place before a mortgage is approved.
It is important that lenders continue to develop new and innovative mortgage products that respond to the ever changing housing market, and the problems and issues that perspective buyers face.
It is just as important that the mortgage industry stresses the benefits that these products can bring to aspiring home owners and explains the measures that are in place to ensure that they are only given to those applicants they are suitable for.
This will ensure that lenders can continue to take lifestyle issues into account when offering potential borrowers loans, safe in the knowledge that they are offering products that are also good value to their customer.
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