Mortgage Guides

Can I afford to get a mortgage?

Updated: Thursday 5 May, 2011

By Hazel Cottrell hazel@consumerchoices.co.uk

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Examine the financial issues you’ll face if you want to step onto the property ladder.

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.

Mortgage lenders slowly started relaxing their lending criteria in 2010

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…

Past

Before the banking sector went into meltdown in August 2007, 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. So keen were banks to lend and so sure were they that the property market would keep on rising, some lenders even offered a 125% mortgage where 95% was taken as a mortgage and 30% taken as an unsecured loan.

However, as the financial crisis unfolded and house prices started falling, banks suddenly became very concerned about “responsible lending” and tightened their lending criteria to such an extent that many first-time buyers found themselves 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 website Moneyfacts. This left first-time buyers with very few options.

Present

After almost two years of not advancing money to anyone with less than a 30% deposit, lenders slowly started relaxing their lending criteria in 2010 to the point that, in the beginning of May 2011, a number of lenders were marketing mortgages that required deposits as low as 5%.

These tended to have higher rates of interest than mortgages offered to buyers with a 20% deposit, but at least high LTV deals are coming on to the market.

In February 2011, Moneyfacts reported that homebuyers without large deposits now appeared to have more choice of mortgages than at any time in the past two years, showing the number of deals at 80%, 85% and 90% had doubled over the last 12 months.

And in March, Skipton Building Society launched a fixed-rate mortgage requiring only a 5% deposit (95% LTV) at a rate of 6.49% to 31 May 2013 and a fee of £195. In April, Santander launched two new “best-buy” mortgages aimed at first-time buyers: a two-year fixed at 90% LTV at 5.55% and a three-year fixed at 90% LTV at 5.99%. Both mortgages levied a £499 fee.

The average two year fixed mortgage is 4.66%, regardless of the deposit amount. But for a borrower with a 10% deposit the rate is 5.2%, or just 3.7% for a borrower with a 20% deposit, according to Moneyfacts.

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

Those with a 20% deposit still get the best choice of deals, as there are now more than 1,000 different mortgage deals on the market for these borrowers, compared to just 523 in December 2010.

Future

Despite lenders relaxing the criteria they demand borrowers meet before agreeing a mortgage, the prospect of returning to a time when lenders offered 100% mortgages on a multiple of ten times an applicant’s annual income is an unlikely one.

Borrowers with large deposits or a significant build up of equity in their existing property are likely to get the most competitive deals, as they are less of a risk to lenders than first-time buyers with a 5% deposit.

Regardless of falling house prices over the last two years, lenders are optimistic enough to offer mortgages with higher LTVs – Moneyfacts found that in the year to February 2011, the number of 90% LTV deals on the market increased by 128%. This not only means a greater degree of affordability for first-time buyers, but also a greater choice of mortgages.

Despite signs to the contrary, UK lenders need first-time buyers because as these buyers play a crucial role in housing market dynamics. The flow of new buyers into the market has a major impact on prices and activity, so if first-time buyer numbers are down, so is the housing market.

And there are signs that, if you get a mortgage, paying it might be easier on your finances than a few years ago because, according to the Halifax, first-time buyers spend less of their income on mortgage payments. In September 2010, the proportion of disposable earnings devoted to mortgage payments by a potential first-time buyer stood at 27%, the lowest since December 1998 and almost half of the peak level of 50% in September 2007.

Also, for first-time buyers, there is no stamp duty to pay on any property up to £250,000 and Halifax says that 95% of first-time buyers now escape paying stamp duty altogether.

And there’s more good news, as the UK’s inflation figures - upon which the Bank of England base its interest rates - are also stabilizing, with many analysts predicting the BoE will keep rates at the historic low of 0.5% until the end of the year.

The affordability of a mortgage depends 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.

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