Expert Insight: Assessing the 2021 Mortgage Landscape with Thomas Davies

Posted by Foxtons New Homes on 1st September 2021 -

Owning a house is, for plenty of people, one of the key life goals to be ticked off, but many don’t realise that there is far more nuance to the purchasing process than simply finding a property, and then getting a willing lender to approve a mortgage.

Research has found that two-thirds of new homeowners don’t understand the terms of their mortgage, while only one in 10 think a broker has the capacity to find them a better deal. This lack of knowledge can be seriously financially detrimental, with one study determining that around two million people in the UK are paying almost £5,000 more each year than they need to on interest alone.

Foxtons is determined to ensure not only that buyers can find and buy a property they love, but can also secure a mortgage deal that works for them. With coronavirus-related restrictions starting to ease, growing numbers of people are dipping their toes into the property purchasing waters, and as a result, will soon find themselves in need of a mortgage that aligns with their needs and circumstances. 

With that firmly in mind, I’ll use this article to take a look back at 2020, see how the pandemic influenced the mortgage landscape of today, and assess whether now is a good time for first-time buyers to think about owning a property. 

Reflecting on 2020

Conditions in the mortgage market throughout 2020 meant it was very much a case of the haves and the have-nots for homebuyers. The global lockdowns of early 2020 led to significant operational challenges for lenders, and subsequently a more cautious stance towards lending risk. 

First-time buyers in particular bore the brunt, with fewer product options – the most notable being the disappearance of the 5% deposit product – and tightened affordability rules reducing the amount that applicants were able to borrow.

The confusion and mixed messages that were abundant throughout the early part of 2020 affected every sector; most companies focused on consolidation, with many quickly realising that it was not viable to continue using a ‘business as usual’ approach. For many first-time buyers, the idea of buying a property was very much put on the backburner. 

The 2021 picture is, however, very different. Transaction levels in Q1 of 2021 were up 50% when compared to the same period in both 2019 and 2020, which indicates that things are not only returning to normal, but that there is undoubtedly a huge property buying appetite at the current time.

A number of factors have driven a surge in sales activity, particularly amongst individuals seeking to get on the ladder for the first time. Pent-up demand following lockdowns, the introduction – and ultimate extension – of the stamp duty holiday (which you can read about in another Expert Insight article), and a more positive economic outlook for the UK as the country starts to recover have all been crucial to increased levels of interest.

The mortgage market, now that it is on more sturdy footing, has seen an increase in product availability, as well as more flexible affordability criteria, meaning that for savvy buyers who take the time to fully realise and acknowledge the mortgage options available to them, there could be substantial financial benefits to buying this year.

A new lender mindset

Various lenders have started to take a more generous approach to using additional income, such as bonuses, commission and overtime, in their affordability calculations, which had been significantly restricted following the onset of the pandemic.

These adjustments are particularly important to the London and south east property markets, where affordability remains one of the key challenges facing first-time buyers, with an average house price to earnings ratio of c.13x.

While the stamp duty holiday is drawing to a close, first-time buyers will continue to benefit for the foreseeable future, given their own open-ended holiday remains in place, guaranteeing that 0% tax is payable on the first £300,000 for transactions up to £500,000 property value.

Prospective first-time buyers have very much been central to the government’s plan to kick-start the post-Covid property sector, and the undoubted headline of this initiative is the introduction of mortgages that are not only available with a 5% deposit, but will be underwritten by the government. 

Thousands of people who would otherwise have struggled to get a property are now able to step foot on the ladder, while lenders have been buoyed by being able to offer mortgages safe in the knowledge that, should a borrower find themselves unable to make repayments, or should a property’s value decline, they will be protected by the government’s buffer.

It certainly sounds like a win-win for buyers and lenders alike, but is that the reality? 

95% mortgages 

The government-backed 95% mortgage guarantee scheme, introduced in April 2021, is an option that will appeal to many first-time buyers. Designed to mitigate the risk that lenders face with offering 95% products, the scheme has set out to ‘recharge’ the high loan-to-value (LTV) end of lender’s product ranges.

The initiative saw significant uptake almost immediately. During April of this year an additional 78 95% LTV products hit the market, while 41 new 90% LTV products launched in the same period. This highlights that not only is the consumer appetite there, but that lenders are very willing to cater to this new group of would-be homeowners, partly due to the reduced level of risk they will have to shoulder. 

As noted earlier in this piece, we have also welcomed improvements to the affordability criteria used by lenders in recent months. Nationwide, for example, recently introduced its Helping Hand mortgage, a scheme for first-time buyers who do not believe they can borrow enough to buy a property. It enables buyers who have a 10% deposit, and also have an annual income of at least £31,000, to borrow up to 5.5x their salary.

That such mortgages exist is, of course, good news for certain buyers, but the fact remains that every mortgage comes with its own distinctions and idiosyncrasies, and signing on any dotted line should not be done without first having an understanding of the pros, the cons, and everything in between. 

Navigating the mortgage minefield

Many borrowers understandably assume that the best starting point when sourcing a mortgage is to look for the most competitive interest rate. The reality, however, is that there are a host of variables to consider, both in terms of the mortgage itself, and the lender’s modus operandi. 

Numerous components play a part in dictating not only what mortgages an individual is likely to be eligible for, but will also go some way to determining which option is liable to be most beneficial. Being employed or self-employed, the structure of one’s income, whether bonuses or commissions are common, residency status, the type of property being purchased (and its location), as well as how much money can be borrowed, will all factor in. 

Lenders can vary significantly in how they treat these different elements, which is why it’s so important to speak to an adviser – Alexander Hall, for example – as early as possible. All too often buyers will invest time into viewing properties only to be let down at the last minute because they either don’t have the necessary guidance, or the advice they have been given isn’t bespoke to their requirements and situation. The value of having a reputable, expert advisor to assist throughout the buying process cannot be overstated.

Final thoughts

For first-time buyers especially, current conditions are very positive. The mortgage market is constantly evolving to help people get on the ladder, and that means there is likely to be an ideal mortgage solution out there for everyone. However, as mentioned earlier, it is vital to acquire – and utilise – guidance from trustworthy, reliable and knowledgeable advisers before committing to any long-term loan deal.

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