High house prices, and higher mortgage rates over the last few years, have made it even more dififcult for many to get the numbers to stack up.
There are roughly 400 deals currently available to borrowers between 95% to 100% of the property’s value, according to the latest Moneyfacts data. But borrowers looking for these mortgages often find themselves constrained by loan-to-income ratios – the amount that can be borrowed based on your income. This means that, despite having a 5% or 10% deposit, they can’t borrow what they need to buy a home.
Standard maximum loan-to-income ratios are 4.5 times income but some lenders offer 5.5 times income and even up to six.
How regulation affects borrowing power
Lenders are restricted by regulations that dictate that no more than 15% of their overall lending can be at loan-to-income ratios of over 4.5.
But the Chancellor has this week called for the FCA to review lending rules to see if they can be relaxed to boost first-time buyer affordability and promote growth.
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Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Whether lending rules should loosen to boost growth is up for debate.
“As has been the case for the past 10 years, regulatory recommendations stipulate loan-to-income ratios of 4.5 or more do not exceed 15% of a lender’s new lending. These then pose challenges for lenders who may wish to leave a buffer to not exceed this threshold during any calendar year. Those that do may have no choice but to change their requirements or withdraw deals from sale.”
This has been proven this week by Nationwide Building Society, which has increased its minimum income requirement for sole applicants to £40,000 for its Helping Hand mortgage, aiming to remain within the regulatory LTI limit.
Springall continued: “Clearly there are desires for loosening LTI rules, but this must be executed carefully to ensure borrowers don’t set themselves up for a fall later down the line and lenders don’t have to suddenly change their rules overnight.
“House prices can rise in the years ahead, but they can also plummet. The latter could be a disaster for borrowers with little equity in their homes from borrowing at the highest ends of the loan-to-value spectrum.”
What’s currently available for first-time buyers?
In addition to standard high loan to value mortgages for those with a 5% or 10% deposit, some lenders have specific schemes to support buyers onto the ladder.
These include:
- Barclays Bank new ‘Mortgage Boost’ to residential and buy-to-let deals, whereby first-time buyers and existing homeowners can add another individual to an application, to increase the amount they can borrow. Anyone on the application is legally responsible for the mortgage but the helper won’t own the property or be named on the title deeds.
- Barclays Bank guarantor ‘Family Springboard Mortgage’ whereby helpers can deposit a lump sum (10% of the amount borrowed) for five years to aid a first-time buyer to secure a mortgage, which is returned to the depositor with interest. Five-year fixed priced at 5.52% at 95% LTV and 5.76% at 100% LTV, up to £500,000.
- Skipton Building Society’s Track Record Mortgage whereby rent payments are used to work out how much someone can borrow.
- Halifax’s ‘Family Boost Mortgage’ whereby a guarantor can deposit a lump sum (10% of the amount borrowed) for three years into a fixed term savings account to help a borrower secure a mortgage, which is returned to the depositor with interest. However, the borrower or helper must have a Reward or Ultimate Reward Current Account with Halifax.
- Lloyds Bank’s Lend a Hand Mortgage whereby a guarantor can deposit a lump sum (10% of the amount borrowed) for three years into a fixed term savings account to help a borrower secure a mortgage, which is returned to the depositor with interest. However, this has a limited distribution.
- Joint Borrower Sole Proprietor (JBSP) mortgages which allow parents to be named on the mortgage, without being a legal owner of a property, are avaiable from a range of building societies.
