Could looser lending rules help first-time buyers or pose more risk?

Several lenders offer support and specialist products for first-time buyers, but could more be done to help people get on the property ladder?

In response to calls from the Government to find ways to boost economic growth, the Financial Conduct Authority (FCA) confirmed that it will “begin simplifying responsible lending and advice rules for mortgages” and would aim to support home-ownership.

This could be significant for first-time buyers, as more relaxed lending rules could make it easier for them to access an affordable mortgage and purchase their first home.

For the past 10 years, mortgages that are 4.5 times the borrower’s income (or more) have only been allowed to make up a maximum of 15% of a lender’s new mortgage approvals.

These loan-to-income (LTI) regulations may force lenders to amend or withdraw products to keep within this 15% threshold, which could particularly affect first-time buyers who often need to borrow a large multiple of their income.

“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,” Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, noted.

Relaxing these rules so higher LTI mortgages can make up a larger proportion of a provider’s new lending could help first-time buyers (and other borrowers) to afford their chosen property.

However, Springall points out that “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,” she explained.

Higher loan-to-income mortgages

While a mortgage that is a large proportion of your income can be risky, this may be the only way for many first-time buyers to purchase a property given the current level of house prices.

Several lenders offer mortgage products with a high loan-to-income ratio, including Nationwide BS.

Despite raising the minimum income requirement to £40,000, the lender’s Helping Hand mortgages still allow you to borrow up to six times your annual income.

Meanwhile, Lloyds Bank and Halifax offer “First-time Buyer Boost” products with a maximum LTI of 5.5, with Leeds BS offering Income Plus mortgages that also allow you to borrow up to 5.5 times your income.

All these mortgage products have specific eligibility criteria and, as we’ve seen from Nationwide BS, they can be changed at relatively short notice.

It’s also crucial to think about the risks of taking on a large mortgage, as a change in your financial situation could make it difficult to afford payments or, in the worst cases, lead to defaulting on the mortgage.

Low-deposit mortgages

There are around 400 mortgages on the market between 95% and 100% loan-to-value (LTV), according to the latest Moneyfacts data, which can be useful for first-time buyers struggling to save up a sizeable deposit.

A unique deal available comes from Skipton BS. Its Track Record Mortgage doesn’t require a deposit and looks at your record of paying rent to work out your affordability for a mortgage.

“Any innovation in the market for first-time buyers should be celebrated,” Springall remarked, adding that “there is so much more room for improvement when it comes to product innovation from lenders”.

It’s a good idea to seek advice from a mortgage broker to help you find an affordable mortgage that’s right for you.

How families and friends can help

Six in 10 (57%) renters believe that it’s impossible to buy a home without any inheritance or help from family, according to a study from Barclays Bank.

But, instead of a family member offering direct financial support in the form of a gift or loan, there are also a number of specialist mortgage schemes available that allow family and friends to help first-time buyers in other ways.

For example, Barclays Bank recently introduced a “Mortgage Boost” product, which allows first-time buyers to add another individual to their mortgage application. This can increase the amount they can borrow as the lender looks at the incomes of both individuals as part of its affordability checks.

The bank also offers a Family Springboard Mortgage for first-time buyers with little to no deposit. Instead of putting down a deposit, family or friends can use their savings as security for the mortgage by transferring the required sum into a specific savings account. The helper will get their money back, with interest, at the end of the term.

Alternatively, first-time buyers could also consider Joint Borrower Sole Proprietor (JBSP) mortgages which are offered by several building societies.

These specialist products allow first-time buyers to add a family member to their mortgage and, because the lender will consider both incomes when assessing affordability, it can help first-time buyers get a larger mortgage.

With any of these products, it’s important that a friend or family member planning to help a first-time buyer understands the implications it could have on their finances and seeks independent legal advice.

For example, adding your name to a mortgage could affect your credit score and means you are equally responsible for the monthly mortgage repayments.

Should you speak to a mortgage broker?

Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that aren’t available to the public. Mortgage brokers are regulated by the Financial Conduct Authority (FCA) and are required to pass specific qualifications before they can give you advice.

Speak to an award-winning mortgage broker today