If you’re considering buying your first home, the most important step is to consider how your finances will be affected and how you can secure the best mortgage deal for your needs.
Here are our top tips for ensuring you are ready to buy before you begin your house hunt:
- The first thing you need to do is work out your budget. You can use an online mortgage calculator for a rough idea of the amount you will be able to borrow and how much it will cost, based on your savings and your income.
- In addition to your deposit, you’ll need to have enough saved to cover the associated costs of buying a home, such as legal fees and a lump-sum Land and Buildings Transaction Tax.
- Get a copy of your credit rating so that you can see what potential lenders will see when considering your application. If it’s not looking great, there are some simple steps you can take to try and improve it. Similarly, if there are any errors, seek to have these corrected before you apply for a mortgage.
- Pay off as much of your existing debt as you can afford before applying – large amounts of unpaid debt can give lenders the impression you are financially irresponsible.
- Gathering all the paperwork you will need for the application process in advance can help prevent potential delays. This should include bank statements and payslips from the past three months, proof of any bonuses or commission and your latest P60 tax form. You may require additional documents depending on your situation.
- In addition to your income, lenders will assess your monthly outgoings to consider whether or not you would still be able to afford your repayments if interest rates were to rise. It is best to cut back on your spending in the months before you apply so that lenders can see your finances will be able to cope with such a rise.
- The bigger the deposit you are able to save, the less interest you will have to pay each month. If you can significantly increase your deposit in the next few months, it may be worth holding off until you become eligible for a deal with a lower interest rate.
- If you are unable to save a substantial enough deposit, look into government initiatives which are aimed at helping first-time buyers get on the property ladder.
- Once you have a rough idea of your monthly repayments, consider all of the additional costs of being a homeowner such as building and home insurance, furnishings, general maintenance, and potential increases in utility bills and council tax.
- Before you begin house hunting, you should seek an Agreement in Principle. This not a binding offer of mortgage but an indication of a lender’s willingness to give you a mortgage and the amount they will allow you to borrow before you begin viewing homes and putting in offers. The agreement is non-binding and you can continue to shop around for a better mortgage deal as you search for your dream property.
For the first time in September this year, mortgage approvals were lower than they were for the same month last year (see table).
Approvals have been falling gradually for most of this year, but September is the first month in which they were lower than the same month the year before. Moreover, it seems likely that this will also be true for the next three months, partly because there was a steep rise in approvals at the tail end of last year which won’t be matched this year.
It’s hard to avoid the conclusion that mortgage lenders and the Bank of England have stamped harder on the brakes than was necessary.
No doubt, some borrowers are being put off by fears of increases in interest rates, but it’s unlikely that the slow-down in approvals is entirely attributable to consumer concerns about rising mortgage payments.
It seems much more likely that the Mortgage Market Review (MMR, you can find out more about it here) is having more of an impact than expected. And new rules on the proportion of mortgages that can be made available at high multiples of income (more here) which came in to force in October may have made lenders more cautious still.
The MMR was designed to ensure that borrowers could afford to repay their mortgage, even if interest rates rose sharply. All of which makes perfect sense.
But the way the rules are currently applied means that lenders make no allowance for the ability of a borrower to reduce their spending elsewhere if their mortgage costs rise.
Indeed, so strictly are the rules being applied that Pensions Minister Steve Webb has written to the Council of Mortgage Lenders urging banks and building societies not to take pension payments in to account when calculating mortgage affordability (more on that here).
And he’s right. Pension payments are discretionary – you can suspend them if you need to. The same is true for a raft of other things. The Money Advice Service, for example, says that lenders will take in to account your spending on things such as cinemas and nights out, TV subscriptions and gym membership. But these are exactly the sort of things you drop if other financial commitments – such as a rise in mortgage costs – make it necessary.
The rules requiring lenders to calculate affordability in the event of a rate rise are also unnecessarily draconian. The Bank of England requires lenders to assess affordability if the interest rate payable on a mortgage rose by 3% over the next five years. But the Bank itself acknowledges that the City expects rates to rise by just 1.75% over the next two years and Governor Mark Carney has said several times that rates will not return to their ‘normal’ levels for many years.
To be fair to the lenders, they are terrified that the Bank of England will penalise them in the event of defaults if they can’t prove that they took every possible item of expenditure in to account. But the impact of the way they have implemented MMR is to deprive perfectly creditworthy borrowers of the opportunity to buy their home.
They and the Bank of England should get together to agree that discretionary spending is not included in the affordability calculations and to reduce the potential rise in interest rates that lenders have to allow for.
There is going to be a lot of discussion tomorrow about the need to control house price growth – prompted by widely trailed new restrictions on mortgage lending proposed by Financial Policy Committee at the Bank of England.
At least as far as Scotland is concerned – and large swathes of the country south of the border – any further restrictions on mortgage lending are unnecessary and potentially damaging.
Take a look at the chart below. As you can see, house price growth in Scotland since the start of the recovery in the market in early 2012 has been much more muted than elsewhere in the UK.
Since April 2012, house price inflation (i.e. the change in prices compared to the same time a year ago) for the UK as a whole has been in positive territory. In contrast, the Office for National Statistics (ONS) reported that prices in Scotland were lower than the same time last year over almost half of that period.
It’s true, of course, that prices in Scotland have recovered somewhat in the last seven months, but they remain well below their peak in most areas. And it’s true that house price inflation across the UK at 10% seems high. But strip out London and you get a very different picture.
But what if we are seeing just the start of a house price boom? Would it not make sense to ‘nip it in the bud’ before it gets out of hand?
The truth is that has already happened – for two reasons.
Firstly, new and tougher rules on mortgage lending came in to force on the 26th April this year and it looks like they are already having an effect. Mortgage approvals have fallen for the last three months in a row (see graph below) and are nowhere near their long term average of around 90,000 a month (you can find more on average approval levels here). The BBA (British Bankers Association) whose members account for around two thirds of mortgage lending reported only yesterday that mortgage approvals had fallen in May for the fourth month in a row with their Chief Economist, Richard Woolhouse, saying that: ‘Our figures indicate that the heat appears to be coming out of the housing market’.
Secondly, there is growing awareness that interest rates are set to rise at some point relatively soon – possibly this November. While any increase is likely to be small, it will certainly remind borrowers that their mortgage costs could rise in the future and, in my experience, buyers have been very sensitive to the possibility that rates could rise in the future.
On that basis, the FPC should stay its hand tomorrow. It could, of course, outline changes that it might make in the future if necessary, but there is no immediate case for making more changes now.
And there is a very good argument for not making it even harder to get a mortgage. Effectively increasing the size of the deposit that a borrower needs to qualify for a mortgage (which is the likely outcome of any new rules) would mean that only borrowers backed by the bank of mum and dad could buy a house. There are plenty of hard working, responsible and solvent would-be buyers who can’t dip in to family funds to build a deposit. They should not be excluded from home ownership because the Bank is trying to quell house price rises in London driven – at least in part – by cash buyers who are not affected by mortgage rules in any event.
The Chancellor of the Exchequer is to give the Bank of England new powers to limit mortgage availability. There’s no certainty that they will ever be used, but if they were, what impact might that have on the Scottish market?
In his Mansion House speech last night, George Osborne said he would give the bank two new powers. The first would enable the bank to ‘limit the proportion of high loan to income mortgages each bank can lend, or even ban all new lending above a specific loan to income ratio’. The second would give it the authority to put a limit on the maximum size of a mortgage relative to property value.
The necessary legislation is due to be in force before the next general election – in other words, by May next year. I suspect that new mortgage lending rules that came in to force in April will mean that the Bank never has to use these new powers, but if it did, would it have any significant impact in Scotland?
Probably not – and here’s why.
The Bank’s first option is to limit the number of high loan to income mortgages that banks can lend. But, as the Council of Mortgage Lenders points out buyers in Scotland tend to borrow less relative to their income than others. In the CML’s latest report, it says that the mortgage for an average first time buyer in Scotland is currently 2.98 times income. That is a good deal less than the average 3.42 times income for the UK as a whole.
It is inconceivable that the Bank would introduce a limit on loan size that would bring the UK property market to a complete halt which means that any limit set on the size of a mortgage relative to income would almost certainly be significantly higher than the current Scottish average. Most Scottish buyers will never get near to that limit and those that might have done will already have had to get through the stringent affordability tests introduced in April.
The second option open to the Bank is to cap the amount that can be borrowed relative to property value. But it seems that George Osborne, at least, seems to see this as a last resort. The phrase he used in his speech was ‘And if they [the Bank of England] really think a dangerous housing bubble is developing, they will be able to impose similar caps on loan to value ratios’.
Now, a loan to value cap would have an effect in Scotland because fewer buyers here have access to large deposits amassed with family support. But it seems that the government expects the Bank to use option one first and that in itself should have effect of moderating house price growth sufficiently to make option two unnecessary.
Overall, it looks like the new rules – were they used – would have their greatest impact in London and the South East where prices and borrowing as a multiple of income have risen sharply while leaving areas with lower property prices and lower borrowing as a proportion of incomes relatively unaffected. Isn’t that what the doctor ordered?
News from the Bank of England that mortgage approvals to purchase property in December last year reached their highest level for six years (see here for more detail) prompted a question: what volume of mortgage approvals would we expect in a ‘normal’ market?
In other words; what level of transactions would you expect in a stable market that was functioning properly (i.e. allowing people to sell and buy homes without undue difficulty)?
The question is more than academic. If we are already there (or thereabouts), you might conclude that any further increase in activity was a sign of a market overheating. If, on the other hand, activity levels remain subdued, you would be more likely to think that the market has some way to go before it reaches equilibrium.
The trouble is that recent years are hardly a good guide to a ‘normal’ market. Since 2008, transactions have been severely depressed by limited mortgage availability. Before that, they were arguably inflated by a house price boom.
Mortgage approvals in a ‘normal’ market
So, to get a better handle on the number of transactions we might see in a period without boom or bust, I’ve looked at the number of mortgage approvals over the decade from 1994 – 2003 (see graph). To see the full data series, go here and tick the box for the series titled LPMVTVX. That covers a period of reasonable activity avoiding the last downturn in house prices and the years of peak price rises from 2004-2007.
Over those 10 years, mortgage approvals to purchase averaged 1.15 million a year – an average of 96,000 a month (although there are substantial seasonal variations).
2013 approvals 36% below decade average
So, how does that compare with 2013? We now know that there were 734,000 mortgage approvals in 2013. In other words, mortgage approvals last year were 36% below what you might consider a ‘normal’ level.
Of course, I am using mortgage approvals here as a substitute for actual purchases* and that is not a precise measure.
We know, for example, that the number of transactions that don’t involve a mortgage increased during the recession, so mortgage approvals might underestimate the level of activity in the market. On the other hand, the size of the housing stock has also grown (if not by as much as we would want) which should mean that there are more properties to sell and buy.
‘Normal’ is an additional 35,000 approvals per month
Even making allowances for both of these factors, it looks like transactions are still some way below a level that might be considered ‘normal’. To put that in perspective, it would require an additional 418,000 mortgage approvals (to purchase) this year before we got back to the levels we saw between 1994 and 2003. That is almost 35,000 extra approvals per month on average. That still looks a long way off.
* Why use mortgage approvals to purchase property rather than actual transactions? And why use UK and not Scottish figures? Because I can’t find data from Registers of Scotland going back beyond April 2003 and because the Bank of England does not issue separate data on approvals for Scotland alone.
The Bank of England ‘Trends in Lending’ report issued yesterday confirmed the strong improvement in mortgage approvals to purchase property.
What was interesting, however, was not the most recent data (which had been issued earlier in the Bank’s regular Money and Credit report), but the historical data going back to 2007 (see table below). Immediately before the onset of the ‘credit crunch’ mortgage approvals were running at comfortably above 100,000 a month. Even if approvals reached 75,000 a month in December or get to around that level in January, mortgage approvals will still be 25% or more below their level before the recession hit.
Don’t get me wrong. The improvement in mortgage lending is genuine and significant. But it’s not at a level that would suggest boom times are here again. And with new powers to limit mortgage lending, the Bank is sure to step in to prevent that happening.
It’s prediction time again and we are awash with a slew of forecasts for the property market in 2014.
I’m not certain that predictions are of any great value. Earlier this year, remember, we were worrying about a triple dip recession and no-one had heard of Help to Buy. Which only goes to show that no-one really knows what will happen next year – sorry.
But what we do know is what influences the market and that at least tells us something about what to look out for in 2014.
Rule number one; the state of the property market ultimately depends on mortgage lending. Mortgage lending started to improve this spring (largely thanks to Funding for Lending) and the number of property sales followed. The number of mortgage has grown more sharply since the launch of Help to Buy opened up the market to buyers with smaller deposits.
The Bank of England will be closing the Funding for Lending scheme to mortgage lending in 2014, but it is doing this on the basis that mortgage lenders can get that money easily enough from elsewhere. Lenders seem to agree and the Council of mortgage lenders predicts that mortgage lending will grow to £195 billion in 2014, up about 15% from £170 billion this year. You can that report here.
But the Bank also says that is has powers to intervene with mortgage lenders to require them to apply stricter rules on mortgage lending if it (the Bank) thinks the property market is overheating. It could, for example, prevent lenders from extending the mortgage period from the traditional 25 years to 30 years. Or set a cap on the maximum loan for any level of income.
So, the markets will probably allow mortgage lending to improve. The thing to look out for will be regulatory action by the Bank of England.
Even if mortgage availability continues to improve, demand could be hit if buyers (and you may well be one of them) conclude that interest rates are likely to rise soon and by a good deal. The Building Society Association sentiment tracker recently reported that 27 per cent of borrowers fear an increase in base rate over anything else in 2014.
At the moment, the financial markets think that the Bank of England base rate will rise from its current 0.5% in the first three months of 2015. But the expectation is that the rise will be small – to 0.6%. According to the City, the Bank base rate will only reach 1.0% by the end of 2015 and 2.0% by the middle of 2017.
The Bank itself is much more cautious. Spencer Dale, Chief Economist at the Bank told businesses recently that; “You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we’ve seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher.” In fact, it is much more likely that the Bank will use it powers to restrict mortgage lending than it is to risk hobbling the recovery by raising interest rates prematurely.
You can argue that what really matters is what mortgage lenders will have to pay to borrow the money they lend to buyers and that is determined by the City, not the Bank. But even there, the news is relatively good. The ‘spread’ between what your lender pays to borrow money and they amount they want to charge you is falling very gradually as competition between mortgage lenders hots up.
True, the spread is still way above where it was before the credit crunch, but it has been falling very gradually since early this year (see graph).
Overall, it seems likely that rates will stay low for a sustained period and that, even if the Bank does increase rates sooner than it says it will, competition between lenders will help to cushion the blow. The key metric to look out for here, however, is market expectations of future interest rates rather than changes at the Bank of England.
Demand and supply
Sales outpaced new instructions in 2013 and stock levels have fallen accordingly. Short of changes to mortgage lending and interest rates (see above), there is no obvious reason why demand would fall next year.
So the big unknown is whether there will be a corresponding rise in the number of homes coming on to the market. There has been a very gradual increase in the number of homes coming to market in the last few months, but not enough to outpace the increase in sales.
The return of first time buyers (who don’t have a house to sell) adds to demand, but not to supply, and not all of that demand will be absorbed by new construction. An increase in supply will depend on existing homeowners deciding to move home and so sell their existing property.
That is likely to happen to some extent as renewed confidence in the market will encourage some who have postponed a move to act now. But if all of these movers intend to buy as well as sell, the increase in supply will always be matched by demand. On balance, it seems likely that demand will continue to exceed supply. The key metric to look out for is stock levels. If they start to rise, that would signal a major shift in the balance of demand and supply.
In normal circumstances, an imbalance of demand over supply would lead to rising prices. Indeed, there are a growing number of reports that this is happening. The ONS has just reported that prices in Scotland to October this year were 3.3% up on the same time last year. You can see that report here.
But be careful what you read in to these results. For example, in October the Registers of Scotland reported house prices in Scotland rising by 1.5%.
But that overall figure included a sharp rise of 10% in Aberdeen and a fall of almost 9% in East Dunbartonshire. The graph to the right (which relates to a slightly earlier period) illustrates the point perfectly. In short, the average figure is wrong for anyone in either Aberdeen or East Dunbartonshire. Even in Glasgow, the trajectory of prices will vary from one area to the next.
So, while some areas are seeing the return of closing dates, others are still in the doldrums. Whether prices are rising, falling or staying the same in your specific location is impossible to tell from the raft of house price reports that are issued every month or quarter. If that is the level of detail you want, you need to talk to a professional with local knowledge.
Nevertheless, if average price rises are sustained, the more likely it is that this will affect a wider range of property types and locations. Are we about to see that happen?
Once again, nobody really knows. It is almost certainly true that prices stopped falling in most areas at some point this year. It is not unrealistic to believe that there could be some recovery in prices in 2014.
But three points to bear in mind.
Firstly prices in the west of Scotland dipped quite sharply earlier this year. Even a 5% recovery in prices would only get us back to roughly where we were this time last year.
Secondly, prices in this area are still below their peak in 2007. In London prices are reported to be above where they were at the last peak and other parts of the South East of England seem to be moving in the same direction. But here, prices will have to rise quite sharply, by as much as 20% in some areas, to get back to that level.
Thirdly, there is a limit to the amount buyers can borrow without a return to growth in real incomes. In the last few years, wages have stagnated while costs have risen. That limits the amount we can afford in mortgage payments at exactly the point at which the lenders are being more thorough about checking our income and more cautious about testing our ability to withstand shocks such as a rise in interest rates. That will tend to put a cap on how much prices can be pushed upwards.
The key metric here is not so much about house prices as it is about income growth. If incomes start to rise faster than inflation (and house prices) the improvement in affordability will give buyers the financial firepower to push prices higher. Without that, there is a limit to what demand can do. Of course, if incomes do start to outpace inflation, the Bank of England will probably see that as a signal to raise interest rates.
October was a good month for the property market according to a slew of data released in the last few days. Mortgage approvals reached their highest monthly total since the start of 2008 and sales in Scotland were 21% up on the same month last year.
It’s all good news, but put the figures in to their historical context and you’ll see how much further there is to go before we get back to what might be considered a ‘normal’ market.
Scottish property sales were 21% up on the same month last year in October according to the Registers of Scotland. They have been above the same level a year ago in every month this year with the exception of February (see graph) and total sales this year are likely to reach 82,000 or so – the highest figure since 2008.
That is definitely a move in the right direction, but it is still a good deal below the level of transactions you might expect to see in a fluid market. Average sales today are around 7,000 a month. Average sales in 2004 were over 10,000 a month.
The latest data from the Bank of England shows that approvals to purchase property (i.e. excluding re-mortgages) reached 67,700 on October. The last time approvals were at that level was February 2008 – over five years ago. You can the number of approvals per month since 2008 here.
But take a look at the graph issued recently by the Council of Mortgage Lenders on mortgage lending in Scotland since 2006. You can see an improvement in lending this year, but lending to movers and first time buyers alike is still a long way below where it was in 2006.
As to prices, the Registers of Scotland (you can find their data here) estimates that the average selling price in Glasgow has recovered from a low point of £95,500 last year to £111,000 at the end of the last quarter. But that is still approximately 14.5% lower than its peak of £130,000 in 2007. You can find more information about house prices on this blog here and here.
In short, the property market is certainly making good progress but it is still some way from robust good health.
Do homeowners know that they can use Help to Buy to move up the property ladder?
A revealing statistic from a recent Council of Mortgage Lenders (CML) review of the market showed that the number of purchases by so-called second steppers has only increased by around 3% since 2009
Over the same period, purchases by first time buyers are up by 40% and by landlords up by a whopping 80%. You can see that review here.
Now, a little perspective might help here. The CML expects movers to take out around 325,000 mortgages this year while first time buyers will account for 270,000 loans and landlords will take out around 160,000 mortgages. So, second steppers are still the largest group of buyers.
Nevertheless, it seems that first time buyers are the ones taking greatest advantage of improved lending conditions. Lending to first time buyers was growing in any event, but the UK government’s analysis of Help to Buy (HtB) in England shows that the majority of HtB purchases so far have been by first time buyers. Over 90% of those who used the new home version of HtB in England were first time buyers.
For movers as well first time buyers
Which begs the question, do homeowners know that they can use HtB as well? There are many reasons why existing home owners decided not to move, but perhaps the largest obstacle has been the relatively low level of equity that some now have in their property.
But this is exactly the sort of situation that HtB is designed to address. A 95% mortgage makes it possible for those with relatively little equity in their current property to move home.
Say, for example, someone currently has £15,000 equity in their home. To buy a home worth £200,000 with a typical 15% – 20% deposit would only be possible with £30-40,000 equity in their current home. But a 95% mortgage with the Help to Buy mortgage guarantee scheme would cut the size of the deposit required to just £10,000, putting a move within reach in a way that has not been possible for the last five years.
At the moment, that message doesn’t seem to have hit home. Most people, it seems, assume that Help to But is only intended for first time buyers. That’s not true and it’s time that existing homeowners recognised that they can benefit from HtB too.
You will find an outline of both Help to Buy schemes here.