[F336]First Time Home Loans

In a white-hot property market homebuyers are being encouraged to take on potentially dangerous levels of debt to get on the property ladder. Financial commentators are growing increasingly concerned that many homebuyers are overstretching themselves as they battle to get into the market and this concern has been fuelled by mortgage repossession orders reaching five-year highs. This article explores the state of the housing market and debates whether there will be an underlying collapse in the market

Loans a balloon set to pop?

The average house price has almost tripled across the UK during the past decade. From a pinnacle in rising property prices in 2002 to 2003 we are seeing another mini-boom, which is making matters worse. The Bank of England raising interest rates has done little to curb demand and House prices are at their highest relative to incomes since records began with the average home now costing six times average earnings.

Mortgage companies have therefore been relaxing the restrictions on how much they will lend so that borrowers can still afford to get on or trade up the ladder. Some mortgage companies are now saying they will lend five times salary for both single and joint applications, enabling people to borrow larger amounts. Traditionally, lenders would advance only 3.5 times single and 2.75 times joint income. Their lending decision is based on what they believe individuals can afford to borrow after taking other debts and monthly outgoings into account and in some cases lenders are willing to offer an unprecedented seven times annual income. Some people will be able to cope with borrowing such large income multiples but others won't. It depends on other debts and type of lifestyle.

Brokers also report soaring demand for mortgages that are worth 100% or more of the homes being bought as borrowers struggle to raise deposits. If property prices keep rising, 100% mortgages can be a clever way of getting on the ladder. But if no deposit is put down, there is no protection against house-price falls. If house prices do drop, owners could find themselves with negative equity, where the value of the outstanding mortgage is greater than that of the property.

Some lenders will even offer loans of more than 100% meaning that the purchaser is in a negative equity situation as soon as they more into their new home. Property prices have risen consistently over the last ten years or so, but this does not mean they will continue to rise and some borrowers could be trapped in negative equity for years to come.

Borrowers are not only taking on bigger mortgages, they are also carrying debts for longer to reduce the monthly loan repayment, as lenders allow them to extend their loan way beyond the typical 25-year term - to 30, 40 or even 50 years. The problem with taking longer to repay a debt is that the total interest paid will be significantly higher. The difference between a 25-year mortgage and a 40-year one can be double the interest.

There are alternatives. A growing number of parents are helping their children to get onto the property ladder. Almost half of first-time buyers are now lent or given a deposit by parents or grandparents, says the Council of Mortgage Lenders. If you have a deposit of 10% or more, you will have access to a wider range of mortgages and you should be able to get a better rate.

Another common way for parents to help is to act as guarantor, so children can borrow more than they could on their own. But for this, the lender normally insists their income is sufficient to cover the child's entire mortgage as well as their own - and any other debts they may have.

If money is tight, advisers recommend going for a fixed-rate deal. These tend to be more expensive than variable-rate loans but come with added peace of mind: borrowers will then know exactly what the monthly payments will be, with no worry if interest rates go up. But borrowers should be wary of mortgage deals that offer ultra-low rates as the chances are that you will be tied in once the initial term has come to an end and be forced to pay a much higher rate. Some building societies offer two year fixed deals at less than 2%, but the problem is that once the term has finished borrowers could get switched and locked in to a rate that is significantly higher than the lenders standard prime rate.

The problem with the housing market is that most mortgage deals are moulded with the assumption that property prices will continue to rise at least in the short to medium term. The problem is that higher lending multiples on incomes and the growing trend of people taking out mortgages of 100% or higher could see a lot of people in negative equity were the market to collapse.

However, with the number of immigrants entering the country from Eastern Europe, coupled with Social factors like a higher divorce rate, people living longer and people leaving it later in life to get married, it is likely that Demand is going to exceed Supply for some years to come.

Perhaps the only thing that is going to put the brakes on house prices is a number of years of massively increased house production, but with house developers still building at around 50,000 to 60,000 less than the governments target of 200,000, it is unlikely we are going to see this for some years to come.

Article Source : How Much Is My Mortgage