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Home » Mortgage loan-to-income ratio worries for first time buyers

Conveyancing
Doormat embossed with First Time Buyer
May 21st, 2021

At BLB Solicitors, our goal is simple – to deliver you clear, practical legal advice and cost-effective solutions. We hope you enjoy exploring our Blog. If you can’t find what you’re looking for, please do contact us.

Mortgage loan-to-income ratio worries for first time buyers

Residential property specialist, Victoria Cranwell, considers how soaring house prices are affecting mortgage applications, particularly for first-time buyers.

To discuss your residential property requirements, including requesting a conveyancing quote, please contact our Property Team by email, or call them on 01225 462871. You can also request a conveyancing quote online.

For first-time buyers, securing a foot on the housing ladder is fast turning into a game of Whac-A-Mole. No sooner had the problem of low-deposit mortgages begun to be addressed than a Deputy Governor of the Bank of England has popped up to announce yet more gloom. In a speech to the Law Society, Sir Jon Cunliffe said that soaring house prices mean that increasingly more mortgage applications are falling foul of lending limits imposed by the Financial Conduct Authority in 2014. And it’s not a problem that he expects to resolve any time soon.

We would usually expect the housing market to cool down when government support for the economy in general and the housing market in particular, is withdrawn. “But there may also be some reasons to believe that the recent increase in demand for housing, and perhaps the composition of that demand, which has driven the UK market in recent months reflects some more persistent drivers and that the market will not fall back to its pre-pandemic decade performance when the tax incentives have gone,” said Sir Jon.

Average UK house price

With buyers rushing to take advantage of the government’s stamp duty holiday, the average UK house price climbed 10.2% in the year to March 2021, up from 9.2% in February. According to the Office for National Statistics, this represents the highest annual growth rate since August 2007.

The average UK property price was £256,000 in March, around £24,000 more than in March 2020. Figures show that prices rose a staggering 2.1% between February and March.

How much can I borrow for my mortgage?

Since 2014, with few exceptions, mortgage lenders must cap the loan-to-income ratio at 4.5 times your income (or joint income for a combined application).

But that is not the sole criterion. Lenders must also assess what level of monthly payments you can afford, balancing your income against various personal and living expenses. This is called the affordability assessment. In addition, they must ‘stress test’ your ability to meet your monthly payments, taking into account factors such as possible interest rate rises and changes in your circumstances, foreseeable or otherwise, such as redundancy or having a baby. If you fail the stress test, a lender may further cap the amount you can borrow.

Help to Buy scheme

With home ownership an increasingly distant dream for many, last week the government announced that the number of homes purchased under its Help to Buy scheme had surpassed 300,000. The number of completions under the scheme in the final quarter of 2020 was the highest ever, and 40% higher than for the same period the previous year.

Victoria Cranwell
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