First-time buyers have seen the amount they can borrow dip by as much as 30 per cent in the year-to-date as banks tighten their mortgage affordability calculators in the face of rapidly rising rates.
With interest rate repayments increasingly eating into borrowers’ monthly incomes, lenders are becoming more cautious as to the maximum amounts of what they will or will not lend.
Managing director of Visionary Finance, Hiten Ganatra, conducted some internal analysis of buyers who his firm facilitated mortgages for in January, and then re-ran their affordability calculations in September.
The results showed a drop in max lending of between 24 and 30 per cent.
This means a £100,000 loan secured with the same level of income in January shrank to between £70,000 and £76,000 in September.
As a result, buyers need to boost their deposits to cover the gap created by the reduction in the loan size they can secure.
“Most buyers are now simply putting off buying due to two primary reasons – monthly mortgage costs and max lending available which is requiring much larger deposits,” he explained.
“As well as impacting someone's monthly budget, tougher affordability calculators configured by lenders are also taking a toll on the max amount they can borrow.”
Many of Ganatra’s clients who previously were able to staircase up to 100 per cent as recently as August are now having to lower their expectations too.
Staircasing gives a shareholder four opportunities to purchase additional shares in their property so that they can eventually own 100 per cent outright. Borrowers can normally buy up to 85 per cent after which the final staircase must be to 100 per cent.
Lower staircasing options, Ganatra said, are down to the stress testing lenders are doing on their affordability calculations.
“Monthly mortgage payments have jumped significantly resulting in clients questioning their motivation to staircase,” said Ganatra.
‘30% dip’ in new home enquiries
Busying themselves with remortgages, some brokers are beginning to note a dip in new purchase enquiries.
Founder of The Mortgage Hut, Chris Schutrups said he has seen a reduction of “around 30 per cent” in new enquiries for customers looking to purchase a home.
Adviser at Harmony Financial Services, Imran Hussain, said he is finding single first-time buyers are becoming slightly less confident in the market, whereas couples are happy as ever to continue with new purchases.
We’re getting more inquiries from clients with credit card loans who are then facing affordability issues. Sophie Foreman, Woldingham Financial Services“Those finding it most challenging are those on lower incomes,” he explained. “But I did just help a single first-time buyer who is a nurse, so it's not all doom and gloom.”
New purchases are still happening, even if they are dwindling.
Director of Mortgage Confidence, Jo Jingree, said she is still busy with purchases in South London.
“I have clients who have been looking for a while for the right property for them, potentially due to a lack of availability or supply,” she explained.
Some brokers have sensed a “fear” among borrowers in the market which has prompted some to ask them whether they can extend the overall term of their mortgages to bring these payments down.
“We’re finding that while first-time buyer cases are proceeding, there is more fear around affording monthly payments,” Sophie Foreman, an adviser at Woldingham Financial Services, explained.
“We are needing to ensure our clients understand the implications of this, in terms of paying more interest in the long run.
“Generally, we’re also getting more inquiries from clients with credit card loans who are then facing affordability issues.”
In Scunthorpe, adviser Bob Riach said he has not seen any drop in new home purchases due to the ongoing shortage of housing stock.
"Driving around last weekend all but one sale board had a sold sign," said Riach.
Uptick in shared ownership and HTB interest
With tightening affordability calculators posing a challenge to deposits and monthly repayments, there has been an uptick in first-time buyers making use of alternative routes to buy a home, with advisers reporting increases in applications for shared ownership and Help to Buy.
Jane King, chartered adviser for Ash Ridge Financial Services, said she has been processing an increasing number of shared ownership applications.
“I expect to see much more of this,” said King.
“It requires less of a deposit and a smaller mortgage. Plus, it's not just for first-time buyers so anyone can apply.
“I know a lot of people hate shared ownership but I think it's a great product as long as the buyer understands how it all works.”
Jingree said she has also seen “a flurry of Help to Buy applications” before the scheme ends on October 31. “Many first time buyers are asking what will replace it,” she said.
L&C Mortgages director, David Hollingworth, reckons as Help to Buy comes to an end and pressure on mortgage affordability grows, other options such as shared ownership “look like they could play an important role in future”.
“Those that had been in the process of saving for a deposit and starting to search for property are bound to be considering their options now, as they recalibrate what their mortgage option might be from both a rate and affordability perspective,” said Hollingworth.
“That’s likely to see them step back and take a breath to wait and see how things pan out in terms of the mortgage market and house prices, which are expected to soften.”
ruby.hinchliffe@ft.com
