First-time mortgage hunters should proceed with caution
There have been headlines that suggest the number of firsttime buyers is at a six year high. There is no doubt that since the property depression of 2007 the market has steadily improved. According to the Council of Mortgage Lenders there were 42 per cent more first-time buyers in May than a year ago equating to a total of 25,100 first-time buyer loans approved. Looking at the statistics alone we can see a significant shift as buyer confidence grows. Lenders are now offering loans to first-time buyers with much better rates and LTV deals but the market isn’t awash with high LTV offers and I would still proceed with caution.
We have to remember two things. The Government’s Funding for Lending and Help to Buy schemes are helping to bolster these statistics but the schemes help people with low deposits. Low deposits or high LTV mortgages are the reason why the property crisis hit hard. With falling values and increasing standard variable rate mortgages people were driven into negative equity and unable to re-mortgage to a better rate leaving some unable to pay their mortgages.
High LTV might seem like a good idea when you haven’t saved a sizeable deposit but remember you will have little, if no equity in the property and all it would take is for a returning dip for the unthinkable to happen – negative equity.
There are good deals available and yes loan approvals are up; only last month Leeds Building Society launched a range of 0 per cent introductory deals, across their five and three year fixed rate mortgages, from 80 per cent LTV – 90 per cent LTV. Sounds good doesn’t it? We really do have to be realistic rather than blindly optimistic though. The reality is this type of offer isn’t across the board; in fact it’s quite unique.
Also if you’ve read the papers lately you’ll know there have been reports of risky mortgage lending too. I don’t want to burst the bubble but I feel I have to reiterate a burning question – can you really afford it?
If you pay a 10 -15 per cent deposit this means you are borrowing 85 per cent – 90 per cent of a property’s value. This may seem like good news but remember you will only own a small percentage of your property. The upturn is only relative to our economic situation, we are still experiencing a depressed market.
Continuing lack of job security, limited pay rises and the ever increasing cost of living means pushing the boat out to secure an 85 per cent – 90 per cent LTV deal is potentially stretching your affordability limits.
Although property prices seem stable it wouldn’t be prudent to think you are sitting on an everincreasing investment. Property isn’t necessarily always going to increase in price, the huge financial gains many property owners experienced towards the end of the nineties are highly unlikely to happen again; leaving current high LTV purchasers with little equity in their properties now and potentially in the future.
With no equity or savings to fall back on where would that leave you? It could leave you with a 100 per cent mortgage and the need to re-mortgage in the hope of securing a better rate. Don’t be fooled by thinking it would be easy to re-mortgage. How many 100 per cent mortgage deals are out there?
Improve your financial odds. If you are looking at a high LTV deal ensure the mortgage you secure is re-paying the capital loan not just the interest, and seriously think about over paying if you have the capability.
Also, don’t forget about insuring your income against redundancy and loss of earnings through sickness, it is nowhere near as costly as the alternative. Above all ensure you seek advice. An independent mortgage adviser can guide you through the pros and cons,
Franz Muelthaler works for Holroyd Miller Properties, Wakefield, in association with Reach 4 Mortgage Solutions.