It is quite ironic that for all the time and energy focused on First Time buyers in the press and from lenders, being a ‘First Time Buyer’ is really of very little significance from a lending point if view! Let’s have a look at who qualifies as a First-Time Buyer?
Do you pass the ‘stress test’?
There was a piece of regulation passed in 2014 called the ‘Mortgage Market Review’ or MMR for short. The purpose of MMR was to look back at what caused the reckless lending leading up to 2008 and to ensure past mistakes were not repeated.
One of the major outputs of these changes was that each lender now applies a ‘stress test’ to the lending that is granted. So in English – can you afford the loan not just now, but also if interest rates rise. By modelling loans based on higher rates also being affordable in a low interest rate environment such as we have now. It safeguards borrowers and lenders for when rates rise and if the buyers’ circumstances change. So who qualifies as a First-Time buyer? One who passes the stress test in the same way as other borrowers.
This change was widely welcomed by the industry but it was diametrically opposed to how lending used to work. In days gone by lenders took a very ‘risk based’ approach. Meaning, if you had a large deposit and/or a strong track record on lending, very few (if any!) questions were asked when granting a loan. As we can see in the lead up to 2008, that system didn’t work so great…
First-Time buyers crucial
So today, every borrower is assessed on their individual merits. That is a really positive move for First-Time Buyers. Historically they were not be able to borrow as much or have to put up a larger deposit, but that is no longer the case. First-Time Buyers are fundamentally important to the market.
If we don’t have new blood coming to the market you are working on decreasing circles. No good for anyone. It’s like having a church congregation that has an average age of 60. You have a problem at that stage. In that example and any other, having a wide range of ages and demographics is positive for the industry.
Discount on Stamp Duty
The only major relevance of being a First Time Buyer today is that you receive a discount on Stamp Duty. You can also often benefit from lenders marketing freebies such as free surveys, cash backs, or lower set up fees.
However, as a broker we are less interested in the window dressing, more in the substance. For example, we will always do a calculation of what is the best overall value of a product over the relevant period.
So for example. Does a 2 year fixed rate with no fees but a higher rate, work out as better value than a product with a lower rate but higher fees?
This is one of many tricks lenders employ to confuse the real cost of borrowing. But rest assured, any good adviser will see past this and recommend the most appropriate product based on the clients’ situation. If cash is short, being a first time purchase, then a cash back product may work well. But go into these situations with your eyes open as it may not be the best value.
Planing to be debt free
As a broker, we do cherish First Time Buyers.
Again, as is true with anything in life, the first time you do something it is scary. So good advice and hand holding through the process is valuable for both parties.
Our view is that this is the start of your journey to being debt free. We’ll work with you for the lifetime of the loan to manage the debt down in the most efficient fashion so you save the most money possible.