News Review: Specialist Prime


Industry must solve FTB deposit problem


by Charles Haresnape, managing director, Aldermore Residential


When it comes to specialist prime lending, no sector is more important than the first-time buyer market. and it’s a sector that


has been under the media spotlight in recent weeks. Shelter thrust the plight


of first-time buyers into the lime light when it announced the results of research undertaken on its behalf by Yougov, which revealed that 84% of first-time buyers said lenders should only lend to borrowers who can afford a loan. i don’t think anyone in the


industry would disagree with that sentiment but it’s a bit like saying pilots shouldn’t be in charge of aircraft if they’re under the influence of alcohol. it’s stating the obvious. one of the consequences


of the credit crunch is that it has forced lenders to be more prudent with their lending criteria and tougher with their decision-making. Lenders are well aware of their responsibilities to accurately assess affordability and, as i’m sure brokers know only too well, lenders are unwilling to grant loans until the borrowers’ ability to repay has been fully stress- tested. the real issue facing


most first-time buyers isn’t their inability to afford their monthly mortgage payment; a period of sustained low interest rates has ensured


mortgages are more affordable today than they have been for a long time. the real issue is their inability to raise sizable deposits.


Deposit problem the cmL put the issue into perspective in a recent issue of its newsletter where it pointed out that deposits, when expressed as a percentage of income, have increased from 41% in the first quarter of 2007 to 87% in the first quarter of 2011. deposits as a percentage


of purchase price have also increased from 10% to 21% over the same period. this is in part a result of tighter lending criteria being imposed by lenders, but it also reflects the fact that average incomes have fallen from £34,200 to £32,507 over that four year period. no wonder first-time


buyers feel like mortgage prisoners, a sentiment echoed by former mP John gummer at a recent association of mortgage intermediaries


when he expressed the view that home ownership is the basis of freedom and people who do not own their own home do not have independence. research undertaken by


Lloyds has also revealed that more than two-thirds of first-time buyers think there is no point in applying for a mortgage because they believe they will be rejected. they have effectively given- up without even trying. a worrying sign. if you consider that there


were 2,583 first-time buyer mortgage products being


22 mortgage introducer JULY 2011


marketed in September 2007 and there are just 183 deals available today, you start to understand why first-time buyers are feeling disillusioned. a product analysis


undertaken by Legal & general throws further light on the nature of the problems. 34% of borrowers have a deposit of 10% or less and yet only 17% of current best buy products are available to them. if you narrow the choice


down still further to those with just a 5% deposit (2.3 million borrowers), then have just 2% of products to choose from. and, as L&g quite rightly points out, interest rates at these LtV levels are amongst the highest in the market. many first-time buyers


dinner,


revert to the bank of mum and dad and end-up borrowing money for a deposit. this is not a long-term fix; it’s more a case of papering over the cracks. What’s needed is a solution for those who can afford their monthly mortgage repayments, but who would wait too long if they had to save-up for a deposit under their own steam (even for those who do struggle to save a deposit, they are left with precious little spare cash to pay for moving costs and fixtures and fittings). Helping first-time buyers


overcome the deposit hurdle has to be a high priority for the mortgage lending industry. all the evidence has shown that government initiatives are not followed through by the industry and therefore have little impact


on addressing underlying issues. the solution to this issue


has to come from within the mortgage lending industry itself. as Shelter will no doubt remind lenders, they must balance the need to act prudently with the need to free first-time buyers from their mortgage shackles. a tough challenge, but


one to which i suspect the industry will rise.


REACHING THE BOTTOM On a related theme, I was intrigued to read an article recently in the Wall Street Journal which questioned if British house prices have really bottomed-out or if the British housing bubble has survived the credit crunch but could still be about to burst.


The journalist who wrote the piece pointed out that UK house prices are still 4.4 times average earnings and, at their peak, were 5.8 times earnings. He believes they should be nearer 3.4 times earnings (US prices were at 4.8 times earnings when its property market crashed). The article puts forward the theory that the UK market is similar to the Japanese market in the 1980s which, since then, has seen property prices in a continual downward spiral. It finishes with the stark warning that the big risk to the UK economy is that the property market suffers a dramatic collapse, from which it may take decades to recover. Let’s hope the journalist is


wrong.


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