No deposit? No deal

With the credit crunch seeming to worsen and go deeper than initally anticipated Chistina Jordan examines how lenders have reacted and what they now expect from potential homeowners.

‘How much can I borrow?’ is one of the first questions asked when looking to buy a property, whether you are a first-time buyer or a home mover. Without a rough idea, you could end up viewing potential homes that are well over your budget, wasting both your time and the vendor’s.

The last 10 years have seen lenders become much more flexible in their lending criteria, as rising house prices meant that they had to offer more to help borrowers onto the property ladder. Loans of six times income were commonplace, as were ‘no deposit’ mortgages.

But the situation has altered dramatically in the last six months as the credit crunch has impacted on the UK mortgage market, shaking lenders to their core and making them extremely picky about how much they lend, and to whom. With house prices dropping for the last five months in a row, according to Nationwide, lenders need to know that borrowers can repay their debts.

In addition, they are finding it difficult to fund mortgages in the usual way (by borrowing from each other and investors), and are relying on the money they get in from savers.
But there isn’t enough to fund the number of mortgages we want. Until lenders are able to start borrowing on the money markets again - which is unlikely to be soon - there is going to be a shortfall of funding.

Some lenders have dropped out of the market altogether and those who remain are chasing profit rather than volume of business.
This directly affects borrowers because they are using a variety of methods to make sure they make the most profit possible in the least risky way.

Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors, says: "Lenders are continuing to respond to the worsening conditions in the money markets by raising the cost of mortgages and tightening up lending criteria.”
Money upfront

One of the first changes lenders have made is to increase the amount borrowers are required to put down upfront for a mortgage. This presents a lower lending risk for them as borrowers are less likely to go into negative equity (where you owe more than the value of your property).

Last month virtually all products that allowed you to borrow 100%, or more, of a property’s value, were pulled and lenders have gone further, requiring increasingly larger deposits.

Halifax upped its minimum deposit from 3% to 5% and Nationwide is reserving its most competitive deals for those with 25% to put down – on a typical UK property this represents a deposit of more than £50,000.

Rachel Jensen, spokesperson for Nationwide, says the lender is simply being prudent. She explains: “It is necessary to review our mortgage deals in light of market conditions and make minor changes. Many other lenders have withdrawn their high LTV (loan to value) products altogether.”

Putting a cap on the size of mortgage available is another lever being used by lenders, particularly smaller building societies. These smaller lenders have started to feel the pinch, withdrawing entire product ranges and returning with tighter criteria. The last few weeks have seen Nottingham, Chelsea, and Bath drop their entire ranges and Holmesdale, Mansfield, Melton Mowbray, Newbury and Tipton & Cosely restrict lending to their local areas.

All in all, it is getting more difficult to find the right mortgage. According to Moneyfacts, 2,000 residential and buy-to-let mortgages were dropped in the last month alone.

Increasing prices is another way lenders can quell demand for their products, and make more profit. Halifax and Nationwide both increased their rates on key products last week.

This is bad news for potential borrowers, especially when it comes to how much they can borrow. Most high street lenders use an ‘affordability calculation’ to work out how much they will lend. This means that instead of looking at your salary and applying a straightforward income multiple (e.g. three times income) they also look at your outgoings and work out how much you can reasonably afford to repay each month.

With higher rates increasing monthly repayments, it is likely borrowers will be considered able to service a smaller debt.

Julia Harris of Moneyfacts states that she has not seen a tightening of income multiples, but points out: “As many lenders now use affordability calculations, which they do not share with us, rather than income multiples, we wouldn’t necessarily know if they had tightened what they will lend in relation to income.”

Square peg, round hole?

The specialist sectors have been the most severely impacted by the credit crunch with a number of lenders closing down, and most withdrawing or curtailing their product ranges and hiking prices. These lenders were often dependent on funding from the money markets and many literally have no money to lend.

Borrowers with a bad credit history will be massively affected. It may not be possible to get a first-time buyer mortgage at all, depending on the severity of your financial problems, unless you have a chunky deposit.

If you are coming to the end of an initial deal, things could be even worse, as your rate will revert to a higher standard variable rate that may be difficult to afford, and you may not be able to switch elsewhere.

The buy-to-let market has not escaped the squeeze either, with many lenders looking to get business from experienced landlords only. UCB Homeloans will no longer lend to first-time landlords and requires a deposit of 25%. In addition it will only lend to a maximum of £350,000 (a modest sum in some parts of the country). The lender has imposed similar restrictions on its self-certification (products often reserved for self-employed borrowers) mortgage range and will not lend to first-time buyers on a self-cert basis.

What can you do?

In the current climate you should be able to get a mortgage if you have three things: a deposit of 10%, a steady provable income, and a clean credit record. If you are an existing mortgage holder looking to remortgage, even better, as you present less of a risk to the lender.

If you can scrape together 5% to put down you should be fine, though you may not get the most preferential rates.

Where you will struggle is if you have a bad credit history, are self-employed, are in arrears or negative equity on your current mortgage, or have other unusual needs or circumstances.

In this case it could make sense to see a mortgage broker, who will be able to scour the market for you and hopefully find a deal that suits your needs – but you may have to pay through the nose for it.

The actual amount you can borrow is not necessarily any less than it was pre-crunch. As Tom Cleary, director of Mortgage Find, points out: “Some of the mainstream lenders are still doing six times income, but they have tightened their credit scoring and want a deposit.”

If you have no deposit at all, your best option is to get saving, or pray for a windfall to give you that all important leg-up onto the property ladder.