Emboldened by a heady mix of higher-multiple lending, 50-year mortgages and optimism in the market, first-time buyers are beginning to return to the housing market.
Unfortunately for everyone struggling to buy their first property, it isn't because house prices have fallen. Prices continue to outstrip wages and the average home now costs 6.1 times the average salary.
But, faced with this reality, lenders are increasingly throwing away their traditional calculations of 3-3.5 times a single salary, or 2.5-2.75 times joint earnings, and looking instead at an individual's ability to maintain their debt.
In 'affordability-based' lending an institution looks at a borrower's income and outgoings and their future earnings potential, not just their current salary, to see what they can afford to repay.
While this could be viewed as lenders looking for ways to justify encouraging people to take on huge amounts of debt, there is no avoiding the fact that flexible lending is allowing more first-time buyers to take the plunge.
Below we take a look at three options: higher income multiples; longer mortgage terms and interest-only deals.
1. Five times and more?
As the average multiple lent to first-time buyers continues to creep up from just under three towards four times their salary, some people are being offered mortgages at historically high multiples.
When, in November, the Abbey and the Co-operative Bank announced that they were offering first-time buyers up to five times their annual incomes there was an audible sharp intake of breath from debt charities and MPs.
But other, less high profile lenders were already offering higher multiples for certain clients. Northern Rock goes up to a ceiling of 5.9, and the Darlington, for a select few, will potentially rise to six times a borrower's income.
Loans for all? Hardly
But, before you start working out how to spend six times your income, it is important to realise that these loans are not available to the majority of borrowers.
While each lender will have their own criteria, you are more likely to qualify for a high-multiple loan if you have a high income.
The Abbey asks for earnings of over £60,000, while to borrow 5.9 times your income with the Northern Rock you would need to earn over £100,000.
In addition you may have to stump up a large deposit. You might be asked to put down 20-25 per cent of the purchase price, a far higher amount than the five per cent an average first-time buyer can afford to put down.
But, if you have no savings, don't despair. The Co-op say they will consider lending five times your income with no deposit at all.
Earnings and outgoings
But in ascertaining your ability to pay off your mortgage, lenders are looking at more than just your pay packet.
David Hollingworth from London and Country Mortgages explains: "They're trying to come up with a more individual approach, so they try to draw a profile; they look at your debts, loans, any maintenance payments and dependents.
"You're therefore seeing a young couple on a decent income getting a higher level of borrowing than a young family."
And, it's not just what you earn now, but your future expected earnings that are taken into account. The Co-op's five times income deal is only available to first-time-buying graduates.
But a degree in sociology and anthropology may not help much. According to David Hollingworth, it's the sure-fire high earners such as solicitors and doctors that are the favourites with lenders.
2. 50-year mortgage
Once you've successfully negotiated a huge mortgage, one way to make it more affordable is by an extended mortgage repayment period.
The traditional, but arbitrary, 25-year mortgage term is slowly being replaced with a more flexible period, with 30, 40, or even 50-year mortgages commonly offered, limited only by your age.
A longer mortgage term will cost you less per month, but over the long-term it works out much more expensive. For example,
£100k at five per cent over 25 years will cost around £585 pm
£100k at five per cent over 35 years will cost around £505 pm
Although by adding ten years to your mortgage you would save £80 a month, instead of paying £75,377 in total interest you would pay a whopping £111,969.
3. Interest Only?
Thanks to high house prices, interest-only mortgages have become popular in recent years and now represent 24 per cent of all new mortgages.
The 100k mortgage above, on an interest-only basis, would cost £416.67 a month. But, advises David Hollingworth, this is not a wise long-term strategy.
"Some people will use it cleverly. They will put away the money to pay off lump sums as and when they can. But it will still cost you more in the long term," says David. "And you need discipline.
"Some people start on interest only, then switch back to repayment after a few years, but it will push up your monthly payments and the longer you leave it the harder it gets."
Moreover, a recent FSA report revealed that ten per cent of borrowers have no idea, or at best only a rough idea, of how they will repay the capital on loan they have taken out.
Clive Briault, Managing Director of Retail Markets at the FSA, advises: "There is nothing wrong with interest-only mortgages. However, consumers must be very clear about how they are going to repay the loans they take out. Consumers' repayment plans need to be realistic and robust."
Can I really afford to borrow that much?
Of course with house prices showing no signs of slowing up, it would seem a good idea to get on the property ladder however you can. But working out if you can really afford it can be tricky. So keep the following in mind:
1.
Financial advisers usually recommend that borrowers' monthly repayments shouldn't exceed more than 40 per cent of their take-home pay, but this calculation is too simple.
2.
If you're on a higher income you should be able to allocate a larger slice of your income to your mortgage as, unless you develop expensive tastes, the rest of your expenditure doesn't need to increase in line with your wages.
3.
Take into account future interest rate rises - opting for a fixed-rate mortgage should prevent nasty surprises for the first few years.
4.
Always have a contingency plan for unforeseen problems, such as home repairs, illness or a career break to start a family.
5.
Even if you foresee a huge wage rise in your future, make sure your budget isn't so tight in the short term that you're driven into more debt.
6.
And, above all, don't agree to a huge mortgage just because someone's offering it to you. "You have to take some responsibility," says David Hollingworth. "Look within the context of your own month's budget, bearing in mind what you know about your lifestyle, and be sensible.
Nikki Sheehan
© Find A Property 2000-2007
