First-time-buyers rush to borrow thousands

09-05-2016

Abetted by the “bank of mum and dad” and a range of government-backed schemes, mortgage lenders are keenly encouraging first-time buyers to borrow.

The number of deals available for first-time buyers with very small deposits has leapt by almost 50pc in a year. And rates have fallen.

As a result, first-time buyer purchases are up 11pc in a year. Borrowing is cheap and rates are falling: Moneyfacts says the average first-time buyer today is on a rate almost one percentage point lower than at the same time last year.

Borrowers who don’t have any deposit at all are not cast out: Barclays last week changed its Family Springboard deal to allow 100pc mortgages of 100pc of the property’s price, provided borrowers’ families stump up a cash account as guarantee.

The Government’s Help to Buy scheme is also driving a flood of big-mortgage purchasers. It allows first-time buyers to borrow 20pc of the value of their property from the Government.

Not content with borrowing more, buyers are also borrowing for longer, with more than a quarter taking on 35-year mortgages.

But is this safe? Doesn’t this type of lending eerily echo the mortgage practices that triggered the collapse of Northern Rock in 2007 and the crisis that followed?

Paula Higgins, chief executive of the Homeowners Alliance, said she was concerned that some first-time buyers were taking a serious risk. “There’s a frenzy going on, and the Government is stoking it up. “People are being encouraged to buy at any price, and there’s a risk that we could see 2007 happening all over again,” she said.

What’s wrong with buying with a 5pc deposit?

Buyers with small or zero deposits risk falling into negative equity, where they owe more to their mortgage lender than the property is worth. 09-05-2016

That limits your future ability to get another mortgage or move. Richard Donnell, of house price analysts Hometrack, said: “If you’re buying in London as a first-time buyer, be prepared to be stuck in the same property for a few years. “The recent level of house price inflation can’t be sustained.”

A small market drop would affect big borrowers first. At current low rates being unable to switch mortgage might not seem a problem.

Last year the average fixed-rate mortgage was at 2.71pc – almost 2pc lower than in 2010.

But when Bank Rate rises – currently predicted to first occur in December 2019 – most variable-rate loans would follow suit. Even without a Bank Rate rise, lenders could impose higher rates for their own business reasons.

Is Help to Buy safer?

Help to Buy initially results in lower monthly repayments than someone with a 5pc deposit would normally be able to access.

For a £350,000 property, a typical buyer’s monthly repayments in the first five years would be £1,197.55 – £600 lower than their repayments with a standard 95pc mortgage. This assumes a typical rate of 2.65pc.

Borrowers using Help to Buy could also avoid the negative equity pitfall. The size of the equity loan moves in proportion to the value of the property.If the price falls – even beyond the 5pc equity that the borrower has to commit himself to – the Government’s loan size shrinks.

This means borrowers won’t go into negative equity unless the value of the property falls beyond the size of the equity loan. But should the house increase in value, so does the Government’s share.

According to calculations from mortgage broker London & Country, assuming 3pc growth year-on-year, after 10 years the amount repayable on an original equity loan of £70,000 would be £94,074 – which including around £6,452 of interest repayable over the second five years, is effectively equivalent to £30,000 of interest on a £70,000 loan. •

We will look back on Help to Buy as a reckless, even cruel, policy measure •

First-time buyers need £90,000 salary to pay off Help to Buy loan in five years

This is also a risk for borrowers because the deal might limit the amount of equity they have in the property – compromising their ability to move.

First-time buyer Joseph Newton, 29, a business consultant, decided not to do Help to Buy for this reason when he bought last year in Winchester.

He said: “I was worried that there was a danger you would be locked in to your first property – I think more needs to be made about the fact that this limits your options when you want to move.”