Sharing still best for buying in London as conditions tighten
Lloyds, the UK's largest mortgage lender, has decided to cap mortgages of more than £500,000 to no more than 4x a borrower's salary to lessen its exposure to default. The group, which owns mortgage brands including Halifax, Bank of Scotland and Scottish Widows Bank, has stated that it will only affect about 8% of its lending in London.
Many commentators expect other large mortgage lenders to follow suit in an action that seems acutely targeted at the overheated London property market. Any initiatives in this direction would be a pre-emptive move to cover any future Bank of England requirement for lenders.
This article will examine Lloyds' action and its implications for those with aspirations to buy properties in London.
London's average property prices to exceed £535,000 in a year
The Office of National Statistics has calculated the average property price in London to be £459,000 at present. If the current year-on-year rise in this average continued - currently 17% in London - then in 12 months, this average would become £537,000. If the rise was any higher, the average could easily be in excess of £550,000.
This figure is significant, particularly in view of the current limits of the UK government's Help to Buy scheme, which requires, with all other conditions being fulfilled, only a 5% deposit from prospective buyers for purchasing properties worth up to £600,000. It means that, most likely, even were Lloyds to consider lending for an average-priced London property, many would-be purchasers would be frozen out by the 4x household income cap.
£128,000 household income needed for average London property 2015?
Generally, mortgage lenders only consider the two highest incomes when more than two people are collaborating in buying a house. If four people wished to buy a house valued at £537,000, with a deposit of only 5% (=£26,850), then, using the 4x household income cap, the two people would have to each earn at least £64,000, or a sum adding up to £128,000.
Incidentally, the ONS has recently calculated the median average yearly London salary as £34,216, just over half of what each person would require to be considered, ceteris paribus.
Pool deposit funds: borrow less, more cheaply
Some might consider the practice of lenders considering no more than two household incomes when calculating how much they will lend a serious fault when considering sharing a mortgage between three or more people. The better news remains that sharing mortgage repayments and ongoing living costs between more than two people means great savings and, most of all, the larger the deposit sharers can muster, the more expensive a property they can consider buying. Equally, the greater the deposit, the less money needs to be borrowed and the lesser the ensuing mortgage repayments.
Revisiting the example above, considering the purchase of a property valued at £537,000, if four people buddied up and saved £100,000 for a deposit, then they would only have to borrow £437,000. Using the 4x salary formula, the bank would lend this money if the household income was at least £109,000, equivalent to two people earning £54,500. Repayments and ongoing costs, spread four ways, would also be considerably lower.
Sharing to shield against rate rises
Current soundings from most experts continue to downplay chances of any rise in BoE interest rates any time soon. Conversely, there are no absolute guarantees that this state of affairs will continue, particularly given the chances of any unforseen shocks in the financial markets. Once again, the more people you can share mortgage repayments between, the better you are placed to withstand rate increases and, ultimately, avoid your house being repossessed.
Using the mortgage calculator on this site and inserting the values above, if interest rates were to move up 1% from a 4% rate - a reasonable representative ongoing rate - monthly repayments would rise by just under £250 per month in total. Soaked up by four people, the rise for each would only be around £62.
Article Summary
Share a Mortgage encourages all prospective home buyers to consider sharing a mortgage, not only to greatly increase the ability to buy a property, but equally as a hedge against the many threats that currently shadow the property market, particularly in London.
We view sharing as an advantage in securing mortgages for purchasing without underplaying neither the massive cost savings that can be realised after buying nor the greater shield all sharers will have against rate rises threatening repossession of their homes. Join our social network for free, dedicated to helping you finding buddies who can collectively buy a property and help each other stay in it, even if interest rates were to rise.
Read other related Articles:
1. Share a mortgage with friends
2. Share a mortgage with couples
3. Share a mortgage with low incomes
4. Share a mortgage with different shares of deposit
