News & Insights
Older first-time buyers locked out of property market
The future now looks bleak for older borrowers looking to make that first move on to the property ladder. This follows the announcement by The Financial Services Authority (FSA) of a crackdown on the availability of mortgages for those in their fifties. The new rules for banks and building societies mean that mortgages cant be handed out unless the homeowner will repay it before their 70th or 75th birthday.
As a typical mortgage is for 25 years, this will effectively bar middle-aged First Time Buyers (FTBs) – and those looking to buy a second home – from the property ladder unless they can prove they can repay the debt by other means. For example, a person who is 55 will struggle to get a typical 25-year loan when the new rules come into force in April 2014 because it would not be paid off until they are 80.
Many banks and building societies have already started to clampdown on unrealistic borrowing ahead of the FSAs Mortgage Market Review. Lenders are starting to stipulate that if people in their fifties want a mortgage, they will have to prove that they can repay it before their 75th or even 70th birthday. A key rule to be introduced by the FSA will force lenders to make sure that they build a separate pot of money to pay off their mortgage.
The Council of Mortgage Lenders welcomed the FSAs efforts “to ensure that lending is responsible as well as its decision to “moderate some of the more restrictive rules originally planned. The good is that following consultation, the FSA decided not to impose any restrictions on high loan-to-value deals, such as Northern Rocks infamous 125pc mortgages, as they are vital for first-time buyers.
Interest-only deals are to be permitted, but only if the borrower can demonstrate a credible repayment strategy that does not rely on house prices rising. The repayment strategy will also be reviewed by the lender during the loan period.
Alongside income and affordability checks, the FSA will require lenders to ensure borrowers can cope with higher interest rates. The regulator has estimated that its new rules will affect up to 11.3pc of borrowers, or as many as 1.2m of the 11.2m outstanding mortgages in the UK.
Recognising that many existing mortgages will fall short of the stricter criteria, the FSA has introduced “transitional arrangements to ensure that households can refinance. As long as those “mortgage prisoners do not take on more debt, lenders can “switch off the rules. The new regime comes into effect in April 2014, but lenders will be barred from treating “mortgage prisoners less favourably than other customers “with immediate effect.
In summary, many older people who have, for whatever reason, delayed getting that first foot on the property ladder should now perhaps be more realistic about their options. Some good advice for older FTBs may be to shop around for the best deals and try to treat buying a house rather like a plan for a new commercial enterprise. Try to set out a business plan including sound financial plans, which can potentially convince a lender to consider you as a more likely candidate for a mortgage.
Martin Williamson is Head of Residential Property at Latimer Hinks Solicitors in Darlington. Latimer Hinks has a team of around 40 people serving private and corporate clients. For further information: www.latimerhinks.co.uk or call 01325 341 500.
