Mortgage Guides

Can I afford to get a mortgage?

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Writes Hazel Cottrell hazel@consumerchoices.co.uk

In this guide we examine the financial issues you’ll face if you want to step onto the property ladder (5/11/09)

Just two years ago banks were climbing over each other to offer anyone and everyone a mortgage, but now it’s much harder to get credit and many hopeful borrowers are finding it impossible to get on the property ladder.

And yet some commentators have claimed first-time buyers are better off now than two years ago.

In this guide we will take a closer look at mortgage affordability and deposit demands, focusing on at how things were, how they are now and whether they will improve in the future…

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Past

Before the credit crunch hit, mortgages were relatively easy to obtain. 100% mortgages allowed you to borrow the full value of a property and to get a self-certification mortgage, you didn’t even need to prove your earnings.

However, as the financial crisis unfolded and house prices started falling, banks suddenly became very concerned with “responsible lending” and tightened their lending criteria to such an extent that many first-time buyers became excluded from the market.

House prices: Past, present and future

The number of mortgage products available at 90% loan-to-value (LTV) fell from 492 to just 71 from September 2008 to May 2009, according to financial information company Moneyfacts (www.moneyfacts.co.uk). This left first-time buyers with very few options.

Present

There hasn’t been much movement in the mortgage market over the past few months and there are still not many mortgages available for first-time buyers without large deposits.

There are now 103 mortgages available at 90% LTV, according to Moneyfacts.

However, for those who have built up a significant deposit, there are plenty more options. And because the Bank of England base rate is at an all-time historical low, mortgage deals look more attractive now that they did before the credit crunch.

For example, for those with a 25% deposit, the average rate on a 2-year fixed-rate mortgage has fallen from 6.40% in September 2007 to 4.61% today, according to Moneyfacts.

Future

It’s likely that mortgage lenders will continue to lend cautiously and demand large deposits well into next year.

David Hollingworth, head of communications at brokers London & Country (www.lcplc.co.uk), says: “The current situation is, the bigger the deposit the better, and in the space of the next 12 months this is likely to remain the same.”

However, Katie Tucker, technical manager at brokers Mortgageforce (www.mortgageforce.co.uk), says: “Mortgage availability will improve in the next year.”

She argues this is partly because of the recent growing trend of lenders adding “strange criteria” to their higher LTV mortgages. For example, some lenders require you to switch your current account to them before you can take out a mortgage.

Tucker says she expects the trend to continue as “lenders are looking for the opportunity to cross-sell.” They know that if a customer has several products with them, they are less likely to look elsewhere for additional financial products.

How to work out if you can afford a mortgage

Basically if you can put down a substantial deposit, or your family is able and willing to help you, mortgages are currently fairly cheap.

However, if you haven’t saved up at least a 10% deposit, the mortgage market isn’t really working in your favour at the moment. You may need to save harder and for longer before buying a home.

The affordability of a mortgage depends very much on your own personal circumstances, and it is advisable to contact an independent financial adviser or whole-of-market mortgage broker who can provide you with advice tailored to your specific circumstances.

Download our complete guide to buying your first home