3 days ago
‘First-time buyers want cheaper homes — not bigger mortgages'
After years of nursing training, Emma Restall decided to carry on her studies to become a doctor, so that her dream of becoming a homeowner might actually become a reality.
'I will be buying by myself and I wouldn't have been able to get a big enough mortgage on a nurse's salary,' said Restall, 28, from Chippenham in Wiltshire. She finished her nursing degree last year and began studying medicine at Newcastle University, working 12 hours a week as a nurse to fund her studies.
She is among the first-time buyers who have been locked out of the housing market by high prices and tough mortgage requirements — exactly the sort of people who the chancellor, Rachel Reeves, and regulators are hoping to help by relaxing lending rules.
Last week the Bank of England gave banks and building societies dispensation to lend more to borrowers with lower salaries — which the chancellor says will mean 36,000 more mortgages a year for first-time buyers.
Banks started offering bigger loans from this week, but critics fear that relaxing the limits could see a return to the high-risk lending that triggered the 2008 financial crisis, while some first-time buyers say they would prefer more affordable housing, rather than government tinkering with the lending rules.
Some 42 per cent of first-time buyers asked by the financial services firm Moneybox what the government could do to help said it should build more affordable homes. About 18 per cent said they would like to see looser mortgage affordability rules.
Restall said: 'What always seems to be avoided in all these discussions is the gap between the average salary and the average house price. Borrowing more than 4.5 times your salary is nice, but the average house is about eight times salary. And no bank is going to give you that much.'
She hopes to have enough saved to finally buy when she finishes medical school in 2029. She will be priced out of buying in Chippenham, so expects to buy in Newcastle instead.
Restall has saved about £15,000 into a Lifetime Isa (which pays a 25 per cent government bonus on savings for a first home worth up to £450,000) and hopes to transfer another £4,000 from savings at the start of the next tax year in April.
'It feels like the government and regulators are just patching gaps by tinkering with mortgage rules rather than fixing the real problem — that the housing market is just getting more expensive compared with people's salaries,' she said.
Restrictions from 2016 meant that no more than 15 per cent of each bank or building society's new lending could be at more than 4.5 times a borrower's income. This has now been made an industry-wide limit, meaning that lenders have more wiggle room, and can apply to the Bank of England to go beyond the 15 per cent limit — it will keep an eye on the big picture.
Nationwide Building Society will now allow a single applicant to borrow up to six times their income if they earn £30,000 (it was £35,000 last week), while joint applicants can borrow up to six times income if they earn a total of £50,000, down from £55,000.
Yorkshire Building Society this week cut the minimum salary needed to borrow up to five times your income from £75,000 to £50,000. Last week someone earning £50,000 could have borrowed a maximum of £224,500 whereas now they could get a loan of £250,000.
Pressure from Reeves and the Treasury this year have also led almost all high street banks to reduce the interest rate at which they 'stress test' whether borrowers could afford higher payments.
Mortgages at 100 per cent loan-to-value, where no deposit is required, have also made a comeback, having largely disappeared under a crackdown on risky lending after the financial crisis.
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The Financial Conduct Authority (FCA) — the City regulator — and lenders are also discussing ways to make it easier for first-time buyers to get interest-only loans and for tenants to be able to use their rent track record as proof that they can afford a mortgage.
Nikhil Rathi, the FCA chief executive, has called for the government to set out how much risk it is happy for regulators and lenders to take.
James Daley from the consumer group Fairer Finance said: 'We have spent the past 17 years tightening up the rules after people borrowed too much, or too many people borrowed interest-only mortgages with no way to repay them. What exactly are we going to achieve by unwinding them now?'
The average property sale price in England was 7.7 times the average salary last year, up from 6.6 times in 2004, and it has risen from 5.4 to 5.9 times in Wales over the same period. In March the average first-time buyer borrowed 3.58 times their income, at 77.5 per cent of the average sale price, with an average loan term of 31 years, according to UK Finance, the industry body.
Average repayments on first-time buyer mortgages were 22.6 per cent of the average first-time buyer's income in March, the highest share since November 2008, raising concerns that borrowers are already stretching themselves to be able to afford a home.
Martin Stewart from the broker London Money said: 'Because of the cost of living and the higher levels of tax households are paying, we are more at risk of borrowers getting into difficulty rather than a 2008-style banking crisis. You're seeing lenders chasing market share, the rules being thrown out of the window and more debt than you can shake a stick at.'
Making it easier to borrow does nothing to make house prices more affordable, something lenders have acknowledged by calling for the government to build more homes. The government's planning reforms are expected to help, and the Office for Budget Responsibility expects more housebuilding to reduce the average house price by about 0.8 per cent by 2029. But a big loosening in mortgage lending could undo that.
Daley said: 'I'm just disappointed that the conversation on the housing market has come back to affordability and the availability of mortgages, while dancing around the massive elephant in the room, which is the issue of supply.
'Everybody knows that there aren't enough houses and wages haven't kept up with rising prices.'
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Before the financial crisis it was easy to borrow without your income being verified or any checks that you could afford repayments if mortgage rates went up.
The banking industry insists it is not on a slippery slope back to those bad old days — stress test rates have been lowered, but not ditched altogether. Bank of England data shows that about 8 per cent of mortgages in the year to March were lent at 4.5 times income or higher, far below the 15 per cent limit.
Buyers will be able to borrow larger loans if they can afford them, but will still have to pass affordability checks.
Ben Merritt from Yorkshire Building Society said: 'There are customers, including first-time buyers, who can afford to borrow more than 4.5 times their income, who have been shut out of the market. We can now offer them a lifeline to borrow what they need for their dream home in line with our commitment to responsible lending.
'This is crucial in an economic environment where house prices in many parts of the UK continue to rise at a faster rate than incomes.'
