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First class lending

FTBs are an endangered species and need help to survive.

There have been differing reports on the state of the property and mortgage markets but the one thing analysts have in common is they agree that first-time buyers are finding it increasingly difficult to join the property ladder.

The Council of Mortgage Lenders reported that in 2004 the nationwide average property price for a first-time buyer was 117,00, 22 per cent higher than in 2003.

From the 9,000-plus mortgages available on the market, most are inappropriate for first-time buyers. The majority of first-time buyers are opting for very short-term products, such as two-year fixed-rate or base-rate tracker mortgages.

Feedback from clients at Alexander Hall is that the entire process is stretching their finances to the limit. The focus is very much on short-term financial benefit, and short-term stability.

Moving from paying rent to mortgage repayments seems simple on paper but, in reality, it is a daunting prospect.

First-time buyers are increasingly more financially astute and are looking for good advice and the best deal. They require straight talking and honest advice about the entire process of financing a house purchase and the types of mortgage available.

Any company interested in attracting first-time buyers needs to address their key concerns, including the knowledge and financial gaps. Although a vast amount of information can be found through the internet, when taking a decision of this magnitude, first-time buyers invariably want contact with a professional mortgage broker.

Although the lack of knowledge is daunting, the financial aspects of the first-house purchase are the most substantial hurdle. The associated costs of moving are rarely taken into account by a first-time buyer. Conveyancing, estate agency and solicitors’ fees alongside stamp duty are expensive and can often push the total cost of moving up by 10,000 to 20,000.

Alliance & Leicester director of mortgage savings & investment products Stephen Leonard is campaigning for lower stamp duty as he believes it is “a real issue for first-time buyers” and the Con- servatives have pledged to raise the lower limit of stamp duty to 150,000 to help first-time buyers. In addition to the up-front costs, minor repairs or cosmetic changes to the property may be required and usually the house needs to be furnished.

At present, only a fraction of mortgage lending is to first-time buyers. Lenders are cautious of lending to first-time buyers and recent advertising and targeting of this market has been minimal, with only a handful of companies actively targeting graduates or first-time buyers.

Lenders may need to take a similar view to banks in that the acquisition of first-time buyers earlier in their careers will enhance the likelihood of them remaining a customer throughout lifestages.

In terms of altering their products to attract or cater for the first-time buyer, there are small changes which could dramatically benefit a first-time buyer. Extending the standard terms usually offered to buyers will allow higher borrowing and cover the costs of setting up their new home.

The Halifax offers extended terms of up to 30 years and will lend five times the borrower’s salary. The borrowers can readjust the term at a later date when their disposable income increases.

Most lenders use the income multiple system but switching to an affordability calculation would ensure borrowing is tailored to the customer’s budget and ease the pressure on first-time buyers.

If there is a track record of high rents being paid and the borrower can prove that the monthly costs are affordable, then lenders should take this into account in the affordability calculation, on a case-by-case basis.

One hundred per cent mortgages are often publicised as an option for first-time buyers but only a handful of professionals can qualify for these products. Only North-ern Rock and Scottish Widows offer this kind of mortgage and there is usually a higher lending charge attached to he product. A higher lending charge could add as much as 3,000 to a 200,000 mortgage if the deposit is less than 5 per cent.

More lenders need to be willing to widen this type of mortgage to more professionals, even if at slightly higher rates. Alliance & Leicester has launched First Step, aimed primarily at the first-time buyer to help in covering stamp duty. The buyer will get a cashback linked to the size of the mortgage loan. Other benefits include no product fee and free valuation, with a fixed rate of 5.99 per cent over three years.

Parental guarantee mortgages seem like a suitable compromise for lenders and borrowers and the Bank of Ireland does take into account the income from all related parties, not just the parents, as with other mortgages of this type. An improvement to these mortgage products would be where parents are not responsible for the entire mortgage amount rather just the additional loan amount needed to allow the first-time buyer to afford to buy. Parents will often have mortgage commitments of their own and some are unwilling to take on the full responsibility of two mortgages.

It is unfair to expect lenders to take total responsibililty for helping first-time buyers but there are some small product adjustments that will help them absorb up-front costs and the initial costs of repaying the loan.

A more fundamental issue is the availability and cost of housing in the UK. The Government is now driving this initiative with recent announcements on more spending on housing and the potential of 0 per cent starter homeloans but the financial services industry needs to be involved in these initiatives as lenders and brokers know the real issues facing customers.

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