Climbing the property ladder โ trading up from a first and probably cramped home to one large enough for children, and perhaps on to your dream home โ could be a challenging and expensive business.
But the most challenging and expensive of all is probably getting on to the first rung.
There are two problems. The first is that property is expensive, and competition for anything affordable will be brisk.
The second is that lenders are restricted in the kind of lending they can make.
Because of the rules set by the Financial Conduct Authority (FCA) you are only allowed to borrow up to a set multiple of your earnings, and you will need to find a deposit too, which may be substantial in some cases.
But things could be changing, making the bottom rung of the housing ladder just a little easier to grasp.
Relaxing the rules
It was the 2007โ2008 credit crisis that prompted the FCA to set stricter rules on lenders. Lenders had relaxed their lending standards to capitalise on the housing boom making it too easy to get an unaffordable mortgage. Irresponsible lending meant a credit crisis and a real fear of economic meltdown.
The rules were complicated, but they meant that there was a limit on the amount you could borrow, defined by the loan-to-income (LTI) figure. LTI is the size of your mortgage divided by your annual income. So, if your mortgage is ยฃ180,000 and you earn ยฃ40,000 a year, your LTI would be 4.5.
Mortgages with an LTI that is high are few and far between, and that level of lending is difficult for most people to access. For the past 10 years, mortgages as high as 4.5 times the borrowerโs income have only been allowed as a maximum of 15% of a lenderโs new mortgage approvals.
This is restrictive enough for those already on the property ladder, but all but impossible for first time buyers.
The only solution for many up and down the country is to fund a higher proportion of their purchase through a large deposit. Many have no alternative than to appeal to the Bank of Mum and Dad โ and many others may not even have that as an option.
Now, with calls on the Government to boost economic growth, the FCA has confirmed that it will โbegin simplifying responsible lending and advice rules forย mortgagesโ.ย
In other words, strict rules on mortgage lending could be loosened to allow more people to borrow for a home.
What might this mean for you?
There are already ways for first time buyers to avoid the need for a 15% deposit. There are currently around 400 mortgages on the market between 95% and 100% loan-to-value (LTV), according to the latest data from industry observer Moneyfacts data, which can be very useful for first-time buyers struggling to save up a sizeable deposit.
But there is still the problem of tight limits on LTI. Relaxing the rules so higher LTI mortgages can make up a larger proportion of a providerโs new lending could help first-time buyers and others to buy. This could be significant as more relaxed lending rules could make it easier to access to the kind of funding required in todayโs housing market.
There are lenders offering up to 5.5 times your income. Another is launching a mortgage product with an LTI of up to 6. That could mean that instead of ยฃ180,000 as a maximum on ยฃ40,000 salary, borrowing ยฃ240,000 might be possible.
What should you do?
You need to think about the risks of taking on a large mortgage.
You might believe that you could afford it in the months and years to come, but a change in your circumstances, or a big increase in interest rates are possible.
That said, if a mortgage that is a large proportion of your monthly income is the only way to afford the home you want, it may make sense to take advantage of any relaxation in the lending rules.
To find out more about all the possibilities in the market, and the most appropriate deal for your particular circumstances, get an expert on your side. Call us at Continuum today.
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The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product and you should seek independent financial advice before embarking on any course of action.
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You may have to pay an early repayment charge to your existing lender if you remortgage.
