The way lenders assess whether you’ll be able to afford a mortgage is changing from August, but homebuyers still face huge challenges when getting onto or moving up the property ladder.
Under current rules, when you apply for a mortgage or need to remortgage, lenders not only check whether you can afford your payments now, but also if you could still cover costs if interest rates rise.
The rate they must use to do this is usually the lender’s standard variable rate (SVR), plus another three percentage points. That means, for example, that if your SVR is currently 4.5%, the ‘stress test’ applied to assess affordability would be 7.5%.
This rule will be scrapped from August 1, as part of the government’s drive to help more people become homeowners, and lenders will be allowed to set the level of their stress test rates themselves. Lenders must continue to limit the number of mortgages they can offer to borrowers which are 4.5 times or more their earnings.
Changes to mortgage affordability rules have received a mixed reception from the property industry, with some commentators arguing that it will push property prices up further, and that it does nothing to solve the problem of a lack of affordable housing.
Despite the mortgage rule changes, homebuyers continue to face several challenges, including building a deposit, rising mortgage rates, and soaring property prices which, when combined with slow wage growth, squeeze affordability.
According to research by professional services platform Stipendium, the average annual gross salary of a first-time buyer in the UK is £32,927. Assuming the maximum they can borrow is 4.5 times their income, this means they would be able to take out a mortgage of up to £148,171.
However, the average first-time buyer house price is currently £234,469. Even if the buyer had a £35,170 deposit to put down, equivalent to 15% of the property value, they would still need a mortgage of £199,298 to buy a property at this price, so would be short of more than £51,000.
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This is why many homebuyers won’t be able to get their foot on the ladder, or move onto the next rung, unless they either buy with partner or friend, or seek help from the Bank of Mum and Dad.
Parents who do want to help their children to buy a home have several different options available to them, and don’t necessarily have to hand over a big chunk of savings that they’ll never see again. These options include:
• Acting as guarantor
You may be able to act as guarantor for your child so they can get a mortgage. This essentially means you agree to use some of your savings or your own home as collateral, providing the lender with security if your child can’t keep up with their mortgage repayments. Think carefully about the impact this could have on you before proceeding, as there could be serious financial consequences if they don’t pay their mortgage.
• Family offset mortgages
Family offset mortgages enable parents to keep a percentage of the property purchase price in a separate savings account held with the mortgage lender, giving their child access to more favourable mortgage rates. Parents can get their savings back at the end of a fixed-rate period, as long as their child has covered their monthly mortgage payments. A mortgage broker can advise which family offset deal might be right for you, based on your individual circumstances.
• Equity release
If you’re aged 55 or over, you might decide to unlock some of your own property wealth to help your child can buy a home of their own. However, it’s essential you seek professional financial advice if you’re planning on taking this route, as although nothing has to be repaid until you die or move into long-term care, interest charges can mount up significantly over time, reducing the value of any inheritance you might have planned to leave.
Releasing equity could also affect your entitlement to means-tested benefits, so make sure you’re aware of all the pros and cons first. You should only ever deal with providers who belong to the Equity Release Council, the trade body for the equity release sector, as this will provide you with certain safeguards, including a ‘no negative equity guarantee’ which means you won’t end up owing more than the property is worth, even if property prices fall.