UK homebuyers may find it more difficult to get a mortgage, as lenders deal with a wide range of new regulations aimed at preventing lending to people more likely to default on their mortgages. The new regulations require homebuyers to take strict tests aimed at assessing their ability to cover all aspects of household spending.
Examples of household spending tested by the questionnaires include the costs of childcare, takeout food and more. The measures are part of an effort by regulators based in the City of London to prevent the large-scale unaffordable lending which played an instrumental role in the 2008 financial crisis.
Starting from the 26th of April, applicants for mortgages will be required to offer at least three months of bank records to lenders. The statements will be studied to see if borrowers are able to make steady, timely payments on their home loans based on current interest rates, as well as in the event that the cost of credit rises.
While the new regulations are aimed at reducing ‘reckless borrowing’, critics of the regulatory measures believe that homebuyers can sidestep the precautions through strategic spending prior to applying for their loans. Brokers could, conceivably, just encourage buyers to stay frugal for the three months prior to their applications.
According to mortgage brokers, individuals with high incomes who spend relatively little on luxuries could borrow upwards of eight times their annual income through a mortgage, if their questionnaires provide the right answers. Experts believe that the measures, although well meaning, may not effectively combat reckless lending.
Although few examples of the qualifying questions are available, experts note that existing bank applications ask potential borrowers about the amount they’ve spent on parking, entertainment, holidays, pets and more. As childcare costs will become an important factor in applications, applicants with children could be affected.
While the questionnaires will play a role in determining applicants’ access to home loans, traditional factors such as credit scores and monthly expenses, such as loans for vehicles, will still form the bulk of lenders’ decision making.Read more
2013 was an interesting year for the UK property market, with rapidly rising prices in London and the South East and stable prices elsewhere in the country signalling a major return to strength. However, problems regarding affordability, especially for first-time homebuyers, remained key concerns for property market analysts.
With prices still on the rise, 2014 could be an even more interesting year for those in the property industry. The BBC recently sat down with several experts in both the property market and related industries to learn what they thought we could see in the coming months for property investors and homebuyers.
Patrick Sheehy, sales director at packaging supplier PHS Teacrate, claims that 2013 was a recovery period for the housing market. The industry dipped in 2011 but has since recovered, although not yet to the levels observed during the property boom of 2006 and 2007.
As the sales director of a packaging supply company, Sheehy benefits from a strong housing market. Cardboard boxes are, after decades, still the moving container that most of the country chooses. He has noticed higher activity levels than usual during the winter, mostly due to increased demand from movers.
Others in the financial services industry are optimistic about the property market’s growth during 2014. Rah Boulger, who works for mortgage broker John Charcol, is confident of an 8% rise in property prices over the course of the year. He bases his assessment on the Nationwide and Halifax indexes.
Boulger believes that the government’s lending schemes “moved the goalposts” for the property industry, and that further pricing growth is certainly possible with the current conditions of the market. One of the schemes referred to by Boulger is Help to Buy, which allows buyers with limited funds to access long-term mortgages.Read more
House prices have increased across the UK during 2013, up by 3.2% on the whole. In certain areas, such as London and the South East, prices have increased at incredible speed, with 10.6% annual growth and an astonishing 3.5% price rise in November alone.
The average UK home increased in value by 0.1% in November, according to a study from the Land Registry. The average home value in Britain is now £165,411 – a new peak valuation that some economists believe is the result of market distortion.
Housing sales have increased substantially over the last year, fuelled by a large rise in demand for housing accompanied by higher valuations. Many homeowners have capitalised on the opportunity to sell their properties at rates that, just a few years ago following the 2008 financial crisis, were seen as unrealistic.
Some areas have been affected by rapid price increases. In some of London’s most exclusive suburbs, demand has massively outstripped supply, resulting in houses sold at rates far above their perceived market value. The average value of London houses has increased by 10.6% in the last year alone, with many experts believing that it could rise to even greater levels.
First-time buyers have been set back by the massive increase in housing prices. In some London postcodes known for ‘affordable’ housing, prices have reached over ten times the average annual salary for residents, making them inaccessible for a large portion of the market.
However, not all areas of the country have been affected by swelling prices and a surge in property market activity. In the North East of England, housing prices are on the decline, with a fall of 1.6% recorded during 2013. In the South East, prices grew by 3.5% during the year, second only to pricing growth in London.Read more
Economic think tank the Resolution Foundation believes that millions of households could face “perilous” debt levels as interest rates increase. The group suggests that a large increase will occur in the number of people spending more than half of their income on mortgage and credit card debt repayments.
More than 600,000 individuals currently spend more than half of their disposable income on repaying debts, according to the Resolution Foundation. If interest rates increase to 3%, this number could almost double, reaching 1.1 million by the start of 2018 and 2 million if rates continue to increase to 5 per cent.
Almost all of the 600,000 people spending more than half of their income on debts are repaying mortgages, which make up the bulk of UK household debt. Even with a “rosy view” of future economic development, the number of households exposed to serious debt will double, claims senior economist Matthew Whittaker.
Many of the families affected by onerous debts built them up during the pre-crisis period, during which interest rates were low and the cost of taking on debt was far from expensive. A large number of households borrowed heavily to manage the cost of property, which surged during the pre-crisis economic boom.
The number of households spending more than half of their income on repayments was 870,000 in 2007. The Resolution Foundation is concerned that unemployment and poor job growth could lead to a more serious credit crisis that traps millions of households in “debt peril”.
The Bank of England has confirmed that it will not raise interest rates until the job market improves. The bank has set a cut-off point of 7% unemployment as a target for considering an increase in interest rates. During the three months to October, the official UK unemployment rate fell to 7.4% – its lowest level since 2009.Read more
The scheme was launched this April to help first-time homebuyers access homes that would previously have been priced outside of their price range. The scheme offers shared equity loans to homebuyers in order to increase access to property, particularly in expensive areas such as London and the Southeast.
Homes purchased using the scheme cost £194,167 on average, with buyers taking out an average of £38,703 on their equity loan. Most of the Help to Buy sales were made in Wiltshire, Leeds, Milton Keynes and Reading, according to the DCLG.
The total number of new homes bought in England following the launch of the new scheme is 5,375. The data currently available tracks new home sales until the end of September – after this date, the government launched the second phase of the Help to Buy scheme which covers the entire United Kingdom.
Under the second phase of the scheme, homebuyers can also access help through a shared equity loan for existing property. The original phase of the scheme offered help to buyers interested in new properties only. The new arrangement allows as much as 15% of the home’s value to be guaranteed by the Treasury.
While supporters of the scheme believe it has helped people access the property ladder in many important markets, critics of the Help to Buy scheme believe that overuse of Treasury loans could lead to another housing bubble.
Builders claim that the scheme, which has thus far been focused on new housing, has helped their businesses. During the first seven months of the scheme, 18,050 reservations for new homes were made by buyers interested in using the shared equity loans offered by the government.Read more
Consumers are becoming less weary of credit, leading to an increase in demand for credit cards and home mortgages. A report from the British Banker’s Association is claiming that mortgage approvals, as well as credit card spending, are both on the rise.
While the increase in spending is good news for many consumer-driven businesses, the levels of borrowing are far from the dangerous dependence on credit observed during the credit bubble of 2006 and 2007. Lower interest rates have increased the level of borrowing from consumers, but only within a relatively safe margin.
Savers, on the other hand, are suffering from interest rates that are at their lowest point in several years. Economists have claimed that, while the current situation is far from the dangerous credit bubble of previous years, low interest rates and few incentives to save money could lead to a serious decline in savings.
The BBA report shows 42,990 mortgages for residential purchases were approved in September – an increase from the 38,834 mortgage applications approved in the previous month. The amount of mortgages approved in September is 7,000 higher than the six-month average, showing a significant increase in borrowing.
Despite the large increase in the number of borrowers, mortgage brokers claim that the level of confidence displayed by homebuyers is significantly lower than what we saw during the previous housing bubble. Consumers today tend to “play safe with credit” instead of borrowing to purchase property that’s beyond their means.
SPF Private Clients chief executive Mark Harris claims that borrowers are generally interested in “overpaying on their mortgages, taking advantage of low interest rates and paying down debt where they can.”
He believes that homeowners are reluctant to take on more borrowing while there is still uncertainty with regard the economic climate, despite growing confidence in the lending industry.Read more
Tenants are spending more than ever before to rent property in England and Wales, according to a new survey from LSL Property Services. Rents across the UK rose by 2.1 per cent in September compared to the same period twelve months earlier.
Certain areas of the country have experienced greater rent increase than others. The south east of England saw the largest increase in recent months, with monthly rates increasing 3.3 per cent in August alone.
Analysts believe that the increase in prices can be attributed to a surge in the level of demand for rental properties in major cities. An increasing number of people are choosing to rent property instead of purchasing their own first home.
Despite the increase in renters, mortgage lenders have reported strong results in recent months. Real estate experts believe that the dual increase – a surge in the level of demand for rental properties and purchases of new homes – shows that there is a significant shortage of supply going on in Britain.
The government has tried to tackle housing problems in the last year, introducing a variety of new schemes to make property more affordable for first-time buyers. The Help to Buy scheme is one of several measures to make property more affordable.
Some analysts, however, believe that the government’s involvement in the property market could cause a pricing bubble, with excessive support for buyers pushing the price of property upwards. UK house prices are already at their highest level in the last two years, according to recent government statistics.
London has been particularly affected by the surge in housing prices, with a large number of first-time buyers complaining of unaffordable property. Experts claim that the high pricing could lead to a ‘generation of renters’ that are unable to buy property until late in their careers.Read more
Banking chain Halifax has found that buying a new home is 10 percent cheaper than renting. A new study from the bank indicates that homeowners save around £875 a year compared to renters due to cheaper mortgage bills and low interest rates.
The cost of buying a home in the UK has declined over the past few years, as lower-than-normal interest rates and improved credit availability make it easier for many first-time buyers to invest in property.
However, mortgage rates have increased slightly in the last twelve months and the deposit required for many home loans continues to be an issue for buyers. Halifax claims that this is compensated for by the increase in the cost of renting a home.
According to the bank’s latest study, the average monthly cost of renting a three-bedroom home is £672. In comparison, renting a three-bedroom home will cost as much as £745 per month on average, representing poor value for money.
The different in pricing between rentals and monthly mortgage bills has decreased slightly in the last twelve months. Last year, the average monthly cost of buying was £650, and the average monthly cost of renting a similar home was £728.
Because of the financial crisis, the Bank of England’s record low 0.5 percent interest rates have encouraged many former renters to buy. Analysts note that, prior to the crisis, it was significantly less expensive to rent property than to buy.
For example, a home that would cost just £672 per month to own today cost up to £1,072 in 2008. During the same time period, the same home might be available to rent for as little as £720 per month, despite the surge in homes’ sales valuations.
Because of the more affordable mortgage rates, an increasing number of would-be homeowners are taking the chance to purchase property at rates that, just three or four years ago, would have been unavailable.Read more
New figures indicate that mortgage rates are at their most affordable level since the late 1990s. On average, borrowers spend approximately 27 percent of their income on mortgage payments as of the second quarter of 2013. The figure is significantly below the average mortgage payment as a fraction of income for the last 30 years.
Halifax claims that a combination of affordable housing and reduced mortgage rates are allowing more Britons than ever to purchase their own property. The 27 percent average monthly payment is a significant decrease from mortgage payments during the peak of the housing market six years ago, and a great step for the country.
Analysts have pointed to the Funding for Lending Scheme as one of several reasons for the increase in the affordability of mortgages, claiming that it has assisted many lenders in offering lower mortgage rates. House prices have rose at a modest rate in the same time period, which has been compensated for by lower interest rates.
The biggest winners in the current housing market are believed to be the first-time homeowners, who currently have access to a far greater range of properties than at any point in the past six years. Despite this, key areas such as London have seen an increase in housing prices that has affected affordability for many first-time buyers.
Despite the excellent news for first-time buyers, some experts are warning that the current interest rates may not last. Mortgage brokers have recommended that any buyers interested in investing in property ‘lock in’ their rates with a fixed-rate loan before the market takes a step towards higher interest rates.
While mortgages have become more affordable across the entire nation, many cities have significantly higher housing costs than others. The average London resident is likely to spend 36 percent of their income on mortgage payments, while residents of Northern Ireland spend just 17 percent on average.Read more