How to get a mortgage: a guide for first-time buyers navigating the Covid-19 mortgage maze

Expert tips for first-time buyers facing a scarcity of low-deposit mortgage deals.
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Ruth Bloomfield30 October 2020

Mortgage lenders, in general, have failed first-time buyers as the nation grapples with Covid-19, leaving many struggling to take advantage of the stamp duty holiday and get on to the housing ladder.

The number of mortgage products on offer is shrinking, terms and conditions are getting tougher, delays are prevalent and interest rates for those who “only” have a 10 to 15 per cent deposit are increasing.

Boris Johnson’s big idea to help first-time buyers, announced at the Tory Party conference this month, is to turn Generation Rent into Generation Buy by promoting a 95 per cent mortgage. But it’s unclear how this will work, or when it will be introduced.

For now, anybody needing to borrow 85 per cent or more of the value of a home faces substantially higher costs than at the outset of the pandemic, says Knight Frank Finance.

“That’s because lenders are now grappling with such a large volume of transactions that raising the cost of these mortgages, which are generally used by first-time buyers and the self-employed, is the most efficient way of controlling the flow of new applications,” explains Liam Bailey, the firm’s global head of research.

Richard Hayes, chief executive of online broker Mojo Mortgages, says more than 1,000 low-deposit mortgages have been removed from the market since the pandemic began.

And banks are starting to take a dim view of first-timers gifted their deposit by parents or other family members.

Five tips to guide you through the pandemic mortgage maze:

Look out for low-deposit mortgage sales

Some lenders have started offering low-deposit mortgages for a limited time only. “We are seeing lenders, like Coventry Building Society and Virgin Money, dip in and out of the 90 per cent mortgage market,” says Ray Boulger senior technical director at independent mortgage broker John Charcol.

“They announce a small tranche of mortgages which are only available for one or two days.”

Hire a broker who can let you know the instant an offer drops and get the paperwork ready in advance.

You will need proof of ID, proof of address and three months’ worth of bank statements and pay slips, or your accounts if you are freelance.

Using a springboard to home ownership

Boulger also recommends looking at the Barclays family springboard mortgage which will lend 100 per cent on a property, if a family member will put a 10 per cent deposit down as security for five years.

The first-time buyer gets a very decent interest rate of 3.05 per cent, fixed for five years, and their family member gets interest at base rate plus 1.5 per cent. “Both parties get a really good deal,” says Boulger.

Do you need to reassess the wishlist?

Lenders are becoming increasingly tough about how much they will lend. “Lenders have brought in stricter criteria for calculating income multiples,” says Alex Winn, mortgage expert at online broker Habito.

“For example, Barclays previously lent borrowers up to 5.5 times their salaries, this is now 4.5 times, meaning most home buyers are being approved for less mortgage, impacting what they can afford to buy.”

One way around this is to reconsider where you want to live.

Increasing numbers of buyers are considering a move to the suburbs or home counties now that working from home is so commonplace — and this means getting more property for less money.

Factor in the stamp duty holiday

If you have a 15 or 20 per cent deposit your mortgage options are much better. Rates for 90 per cent mortgages are around 3.2 per cent, while 80 per cent mortgages tend to come in at less than two per cent.

The current stamp duty holiday will help you achieve a bigger deposit. If you buy a £500,000 property you save £15,000 in tax.

Upping a 10 per cent deposit of £50,000 to a 15 per cent deposit means saving an extra £25,000, but if you knock off that £15,000 tax saving you’re actually talking about finding another £10,000.

If you really step up your saving between now and the end of the stamp duty holiday on March 31 next year, you might be able to swing it, especially if you are not buying alone. It could be well worth going into self-imposed, money-saving social lockdown...

Take advantage of buying schemes

Both Help to Buy and shared ownership cut the size of deposit that first-time buyers need to put down, either by taking a government loan for part of the cost of the property, or only buying a share in a first home.

And the good news is that lenders seem to be in favour of both these options.

“There is massive support for mortgages through the shared ownership scheme, mainly from building societies who want to attract a younger demographic of customers,” says Mojo Mortgages’ Richard Hayes. “There is less risk to the lender when it comes to giving someone a mortgage through this scheme.”

While the current market feels tough for first-time buyers, most experts believe that as the world starts to inch back towards normality, so lenders will start to reconsider their hard line against young buyers.

“And then we expect the high street lenders to begin competing for business once more, and the higher loan-to-value mortgages to move back in line with the rest of the market,” says Liam Bailey of Knight Frank Finance.