John Charcol offers 95% LTV mortgages for first time buyers
Ray Boulger of leading independent mortgage adviser John Charcol comments on two new innovative 95% LTV First Time Buyer (FTB) mortgages.
"John Charcol is delighted to exclusively offer for FTBs with only a 5% deposit thinking of buying in England and Wales two very innovative, but very different, mortgage options, which may allow their dreams to become a reality. One of these new mortgages requires at least one family member to be involved and has a variable rate of only 3.95% and no arrangement fee. The other requires no family involvement and is a fixed rate of 6.49% until 2015 with a very low arrangement fee of £195.
"One impact of the Lehman debacle nearly three years ago was a freezing of the wholesale money markets, causing banks and building societies to beat their biggest ever retreat from mortgage lending. This resulted in the collapse of net mortgage lending from £109bn p.a. in 2007 to only £8bn last year. One specific impact was that lenders virtually withdrew from offering high Loan to Value mortgages and as a result many would be FTBs have been unable to enter the property market, even though their monthly payments would in many cases have been comfortably affordable.
"This has had a major knock-on effect on the level of activity in the property market as without new buyers entering the market at the bottom it becomes much more difficult for those who want to do so to trade up, although the impact has been partly mitigated by increased purchases from Buy to Let investors, who are providing properties for frustrated potential FTBs to rent. Details of these two new mortgages are as follows:
Option 1 - Newbury Building Society
"This is a Family Offset mortgage, with an initial rate of 3.95%, which is a 0.5% discount off its SVR for 3 or 5 years (Newbury has one of the lower SVRs amongst building societies). Set up costs are very low as there is no arrangement fee and furthermore the early repayment charge (ERC) is only 1% in 3 or 5 years respectively, and unlimited ERC free part repayments are allowed. The maximum loan is £300,000.
"The basis of this 95% LTV Family Offset mortgage is that one or two family members must deposit a total of 20% of the purchase price with Newbury, thus reducing the net loan from the lender's risk perspective to 75% because it takes a charge on the savings. This not only gives Newbury the comfort to offer a mortgage at such a high LTV but also allows it to offer a far lower interest rate than would otherwise be necessary for a stand alone high LTV mortgage.
"Because this is an offset mortgage no interest will be paid on this deposit but the FTB is only charged interest on the net 75% mortgage. Affordability is calculated on the whole 95% loan and monthly payments are collected as if it was a 95% LTV mortgage, despite interest only being charged on the net 75% mortgage. The effect of this is that the mortgage is paid down far quicker. For example on a 25 year term 3% of the capital is paid back in the first year, compared to 1¾% which would have been paid back had the payments been based on a 75% LTV mortgage. Assuming no movement in the property value this means the LTV will fall to 75% in the 8th year, much quicker than with a normal 95% LTV mortgage. Once the LTV falls to 75% the family member(s)' savings can be released but the family member(s) must recognise that these savings are at risk until then should the FTB default.
"Although the family member(s) providing the 20% deposit are giving up the interest they would have earned this is a very tax efficient way to help the FTB, especially if the family member(s) are 40% or 50% taxpayers. As the savings can be in one or two accounts, if a couple are buying together one parent or grandparent from each side could provide 10% each, which may be much easier than 20% coming from one person.
"It may be that the family member is happy to provide the funds for the offset savings account but, especially if it is a grandparent using the interest on their savings to supplement their pension, they can't afford to give up their interest payments. In this situation as the FTB is saving at least 2.5% p.a. by paying a rate relevant to a 75% LTV mortgage rather a 95% mortgage without family help they could afford to be generous to this family member, although actually paying them interest might involve a tax liability.
Option 2 - Saffron Building Society
"The other equally innovative 95% LTV FTB mortgage is offered by Saffron Building Society, and has a fixed rate of 6.49% to 30/4/15. The arrangement fee is only £195 and the ERC is 2% during the fixed rate term, although ERC free overpayments of up to 10% p.a. can be made. The maximum loan is £500,000 and the innovation with this mortgage is the way affordability is calculated.
"This mortgage is called the ‘Rent to Buy' Mortgage because affordability is based on the FTB's rental payment history, which must cover a period of at least 1 year. The maximum monthly mortgage payment will be whatever rent the FTB has been paying. The ability to pay the relevant amount of rent for at least a year provides robust evidence of a similar ability to afford an equivalent monthly mortgage payment.
"FTBs will of course also need a clean credit history but many who have been told by other lenders they can't afford a mortgage with monthly payments the same or less than their rent will see this common sense way of calculating affordability as a breadth of fresh air. The FSA and the EU may struggle to define what is affordable but Saffron has found a simple yet robust way of calculating affordability for those who have previously been renting.
"As an indication of purchasing power someone paying £1,000 a month in rent would be able to buy a property for up to £166,700 with this mortgage, resulting in a mortgage of £158,375 (95% LTV), based on the maximum term of 30 years. If two people who have been renting separately want to buy together the combined rent will be used to calculate affordability. This has not been designed as one of Grant Shapp's Mates Mortgages but it may well enable a couple who want to settle down together but chose to keep renting separately because they couldn't previously find the deposit to buy a property together to start their life together.
Conclusion
Although both Newbury and Saffron will naturally carry out a credit check, critically neither lender credit scores but instead both lenders employ sensible human underwriters, not a computer, to assess all applications! "The computer says no" approach adopted by too many of the larger lenders is anathema to both these lenders and applications will be considered on their merits even if all the boxes can't be ticked!
This is particularly relevant for FTBs because one of the bizarre impacts of credit scoring is that someone who has been thrifty by saving regularly for a deposit, or anything else, but never previously borrowed any money gets a lower score than someone who has never saved but has a couple of maxed out credit cards on which they pay the minimum each month! Madness!