The change that may help you get a mortgage as a first-time buyer
More relaxed mortgage regulation opens the door for some first-time buyers, but it comes with risk.
A recent shift in mortgage lending practices could make homeownership more attainable for first-time buyers, despite the current challenges of high living costs, an average house price nearing £300,000, and rising interest rates on new mortgages.
Previously, saving for a deposit was a significant hurdle. However, updated regulations and increased lending flexibility now allow first-time buyers to borrow up to six, or in some cases, seven times their annual income. While this expands mortgage accessibility, it also introduces certain risks.
The financial crisis of 2008 was partly attributed to reckless mortgage lending, which led to bank failures and widespread home repossessions. In 2014, then-business secretary Vince Cable expressed concern over some lenders offering mortgages at five times an applicant's income, suggesting 3.5 times as a more stable limit.
Since then, house prices have largely outpaced wage growth, making larger loans a necessity for many prospective buyers. Regulatory limits previously restricted lenders, with only 15% of new mortgages allowed to exceed 4.5 times the loan-to-income ratio. Many major lenders adopted a cautious approach, staying well below this threshold.
Over the past year, these regulations have been relaxed. Consequently, many lenders are now providing larger loans relative to income, with niche lenders and building societies leading this trend.
David Hollingworth, from mortgage broker L&C, notes that "The greater flexibility could mean that first time buyers that felt ownership was still out of reach may find that the amount they can borrow has changed markedly in a relatively short time."
Aaron Strutt of broker Trinity Financial acknowledges that while taking on a substantial income stretch isn't for everyone, "it is tempting for many because it gives them the option to get out of renting or living with parents."
To qualify for a larger mortgage as a first-time buyer, strict criteria typically apply. These may include:
* A strong credit history, characterized by minimal credit card debt and loans, and no missed payments.
* A consistent salary, which may exclude many self-employed individuals.
* An income sufficient to meet the requirements of specific mortgages, varying by borrower and lender.
* Agreement to borrow at a fixed interest rate, usually for five or ten years, rather than two.
* Adequate savings for a deposit, though options for low-deposit mortgages have also expanded.
It's also important to consider that circumstances can change. What's available when renewing or seeking a new mortgage after five years may differ, and lenders might become more selective if the economic outlook deteriorates. Personal circumstances, such as job loss, needing time off to care for a loved one, or personal illness, can also impact financial stability.
"Ideally you need to have a cash buffer or a plan in case something happens financially," advises Strutt.