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A consumer’s view

Mortgage lenders are an ungrateful lot. Having campaigned hard and relentlessly for an increase in the starting point for stamp duty and seen it doubled by Chancellor Gordon Brown in the Budget, they are now griping that it is not enough.

The Council of Mortgage Lenders estimates that the inc-rease will remove around 370,000 additional homebuyers a year from the stamp duty net. Last year, there were 1,392,000 house purchases, of which 117,000 were below the 60,000 stamp duty threshold.

After the Budget change, an estimated 373,000 transactions will come under the new 120,000 threshold and while there is no doubt that the Chancellor should have spent an extra 30 minutes taking the trouble to reform the tax, rem-oving the severe distortions created at the higher thresholds, his Budget giveaway will go some way to easing the plight of many firsttime buyers.

Mortgage lenders would do well to remember the old adage: “Be careful what you wish for because you might get it.” Although the new threshold at 120,000 is about 30,000 to 40,000 short of what they were asking for, they can no longer blame stamp duty for being the major obstacle preventing first-time buyers from buying their own home.

The responsibility for easing the way for these young homebuyers falls squarely on the shoulders of the industry and those involved in producing new affordable housing – the Government, local authorities and housebuilders.

Parents are already doing their bit. The post-war baby boomers, now in their late fifties and early sixties, are inheriting relatively big sums from their parents, a high proportion of whom are homeowners, as a result of the massive increase in house prices since the war.

With the average deposit put down by first-time buyers currently around 20 per cent of the purchase price, clearly, some parents are choosing to pass part or all of this inher-ited money immediately to their own children to help with property purchase.

The real problem is the high price of a property rel-ative to young borrowers’ earnings and it is in this area of income multiples where the lenders have got to be more flexible and innovative.

Part of the problem is that lenders get heavily criticised every time it emerges that some young homebuyer has been able to borrow five, six or seven times their earnings. This stupid knee-jerk reaction from the media is no help to anyone, least of all FTBs.

Lenders need to move away from the crude lending criterion of a multiple of gross earnings to a much more common-sense affordability approach. Under the current regime, a potential borrower on average earnings of 25,000 a year can borrow a maximum of 100,000 on a multiple of four times gross earnings and many lenders would consider that stretching things.

If this same borrower can demonstrate that they have been paying rent of 150 a week for the past year or more, not uncommon in London and the South-east, it takes only a different approach to ack-nowledge that at a mortgage rate of 5 per cent, they could have been funding a homeloan of 156,000 – a multiple of 6.24 times earnings.

The mortgage market needs first-time buyers in order that others can sell and move up the housing ladder. The regulation of mortgages, with its lengthy questionnaires, could turn out to be the unlikely catalyst for change. Under the new rules, lenders are obliged to calculate affordability at the time of making the loan and for the foreseeable future.

This will ensure that they ask many more questions about the borrower’s overall financial situation, giving them a far clearer picture on which to base their lending decisions. It may be quick and cheap to assess maximum lending on a crude multiple of earnings but the formula is past its sell-by date.


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