Property News

Is the recent news that house prices have suffered their most dramatic fall in years good for first-time buyers? After all, it isn't only property values on paper that have fallen; in addition, sold property prices have dropped. What does this mean for anyone hoping to buy, especially if they need a mortgage?

Negative equity and tighter lending conditions

Falling sold property prices worry lenders; in particular, they worry that they may not recoup their investment - made in the form of a mortgage - if a borrower defaults on their repayments. If a property is worth less than its most recent selling price and is worth less than the outstanding mortgage, it will slip into negative equity.

Negative equity has a couple of possible connotations from the perspective of a would-be buyer. Firstly, negative equity can slow the rate at which new properties come to the market, as owners are reluctant to sell under these conditions. Secondly, it can lead to tighter lending conditions, which can raise the cost of borrowing for everyone.

Tighter lending conditions may mean that lenders demand a higher deposit, meaning you will need to save more and possibly for longer before applying for a mortgage, and apply higher interest rates to loans. Unfortunately for anyone struggling to save a deposit, the best interest rates are usually only available to those with the biggest deposits or, for anyone seeking a remortgage, to those with significant existing equity in a property.

Currently, anyone seeking a mortgage can expect to have to find a deposit of at least 10 per cent of the purchase price. This equate to a loan to value (LTV) of 90 per cent. In the relatively recent past, this was considered safe enough by most people; however, at the moment, most lending institutions are applying the highest interest rates to borrowers with a 10 per cent deposit. Borrowers who can stretch to a 25 per cent deposit, meaning a 75 per cent LTV, can expect better interest rates. Similarly, if you can reach beyond this figure, you are probably within the realms of the most preferential interest rates currently available. Don't get too excited, however, as these most preferential rates still don't look anything like the low figures many borrowers got used to.

At the time of writing in November 2023, the average interest rate applying to a two-year fixed mortgage with a 60 per cent LTV was 5.35 per cent. A borrower with a 90 per cent LTV looking for the same mortgage could expect to pay 6.03 per cent. Although the series of consecutive interest rate hikes imposed by the Bank of England appears to have ended - for now - in September 2023, there is no sign that they will go into reverse. Consequently, borrowers may need to accept that the current interest rate landscape is the 'new normal'. This may convince some potential first-time buyers that there is little to be gained in waiting.

Interest rates aside, there are always other potentially relevant considerations:

Property availability

We have already touched on this as a possible consequence of rising rates and the perceived threat of negative equity. If you are struggling to find a suitable property, you have three main options:

1. Wait it out and hope the situation changes.
2. Widen your search area or make some other compromise, such as looking for a smaller property.
3. Increase your purchase pot, which clearly, isn't possible for most people and is rarely possible in the short-term.

Future prospects

Pouring money into rent can seem like a loser's game; however, aside from the mortgage repayments, buying property costs money. Legal fees, searches, moving costs and stamp duty can all add significantly to the overall cost. If you are looking at buying a stopgap home or somewhere that will 'do for now', perhaps because you know you will be moving area in a couple of years or expect a big pay rise, you may want to take particular care assessing your options.

The risk of falling into arrears

Recent information reported by the BBC points to a rise in homeowners falling into mortgage arrears, with landlords particularly affected. Figures from UK Finance suggest the percentage of mortgage holders in arrears during the July to September quarter this year rose by 18 per cent compared to the same period last year. In numerical terms, this equates to 87,930 homeowners in arrears. For landlords, the percentage increase is even higher: a 50 per cent rise on last year.

Although clearly troubling, these percentages may not be the whole story. Most homeowners prioritise paying their mortgage above all other debts and most other expenses; consequently, it is quite likely that a significant number of mortgage holders are barely managing to keep making their repayments and are perhaps doing so at the expense of other necessary expenditure, such as council tax, food, and heating. Equally, it is possible that landlords experiencing financial difficulties may not prioritise paying their buy-to-let mortgage in the same way as an owner occupier, which may account for some of the difference between the 18 per cent and 50 per cent figures.

Untangling all this so that it means something to someone contemplating whether to enter the mortgage market is difficult. Unfortunately, there is no ABC guide to follow that guarantees a satisfactory outcome. On the other hand, there is valuable professional expertise available for those who are willing to seek it out and engage with it.

Seeking professional advice

Regardless of your circumstances and finances, seeking advice from a professional mortgage advisor is a sensible step for anyone who is considering applying for their first mortgage. The role of a mortgage advisor includes, but isn't necessarily limited to:

Advising about the homebuying process, especially from a financial angle.
Advising a client about their finances.
Explaining the different types of mortgage and their features and benefits..
Explaining how repayments are made.
Explaining mortgage protection and why a client might choose to take it out.
Offering a variety of mortgage options.
Selling related financial products, such as life or buildings insurance.

For more information about applying for your first mortgage, head to https://www.onedome.com/mortgages/mortgages-explained/. OneDome is a referrer to CMME Mortgages. Both are part of the same group and both are authorised and regulated by the Financial Conduct Authority.

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