First-time buyers may be powering the UK’s property market, but new research shows they are surprisingly ignorant when it comes to understanding how mortgages work.
Three-quarters of aspiring homebuyers thought that LTV (loan-to-value) stood for “long-term value” and was a reference to the projected amount the home was expected to increase in value over the term of the mortgage.
Nearly two-thirds thought mortgage interest rates varied in different parts of the country, depending on the level of house prices in the locality. Over half thought a lender would provide financing up to 10 times the borrower’s income, when the real maximum for the average borrower — capped by regulation — is four and a half times income.
Santander quizzed 2,000 first-time buyers under 40 in the study, which also revealed widespread misperceptions about the property buying process.
Three in five first-time buyers believed the term “exchange” referred to the moment a buyer took possession of the keys to the property — rather than, more accurately, the exchange of contracts.
Nearly half of respondents incorrectly thought that if a homebuying chain collapsed and their sale failed to go through, their legal and surveyor fees would be refunded.
Nearly one-quarter took the word “deposit” in “house deposit” rather too literally, erroneously believing they would get back the down payment a year after purchase.
Younger buyers could be forgiven for not doing their homework — the mortgage sector is awash with jargon, from “fixed-rate deals” and “offset mortgages” to “agreements in principle” and “execution-only”, not to mention acronyms such as ERCs (early repayment charges), SVR (standard variable rates) and APRC (annual percentage rate of charge).
Graham Sellar, head of business development at Santander Mortgages, said the results showed how many people looking to buy struggled with the industry’s accepted vocabulary. “It’s not that easy to find out what you need to do to buy your first home,” he said.
Once a borrower had engaged with a mortgage adviser, he said, their misapprehensions were often cleared up quickly. But the problem was most acute in the two or three years leading up to that point, when potential buyers were considering a purchase without adequate knowledge of the financial steps involved.
Asked if the research implied schools needed to boost their commitment to financial education, Mr Sellar suggested the solution had go beyond this, since the average first-time buyer was in their early thirties by the time they succeeded in buying their first home, around 15 years after the end of their school education. Santander is organising free educational events across its UK bank branch network to explain the homebuying process to people considering a purchase.
Andrew Montlake, director at mortgage broker Coreco, said the findings came as no surprise, as he had encountered a widespread lack of knowledge about mortgages in the course of doing presentations at companies, even among well-educated people in professional jobs.
“They don’t have that understanding because they’ve never been educated on some of the financial issues,” he said. “We started our presentations on a certain level but have made them simpler and simpler. We now start with the real basics: ‘what is a mortgage and how does it work’, ‘what is an interest rate’ and so on.”
One of the current trends in the mortgage industry is the use of technology to ease the mortgage application process and allow people to make their own choices without recourse to advice from a lender or broker. Mr Montlake warned this risked exacerbating the situation by pushing people down routes that assumed a certain level of understanding of the different types of mortgage available. In a complex market, it is difficult for buyers to decide which is the most suitable for them.
“As a professional adviser, I would say this, but this is exactly why we exist,” he said. “People do need advice to make sure they’re not making the wrong decisions.”
When borrowers come to the end of a fixed term or discounted deal, for instance, they typically opt for a “product transfer” or rolling on to another deal with their existing lender rather than remortgaging elsewhere. Lenders are making such decisions easy to take, by allowing product transfers to be carried out digitally.
Figures from UK Finance on Tuesday found the level of remortgages with no additional borrowing in July 2019 was down 12.9 per cent on July 2018. “This has been driven in part by a fall in the number of fixed-rate mortgages coming to an end and the growing popularity of product transfers,” UK Finance said.
Santander’s research comes in the wake of a July survey by the lender which found that two-fifths of potential first time buyers had saved nothing towards the purchase of a property. Most of those who had saved up had significantly underestimated the money they would need for a housing deposit.
In the new research, however, respondents had overestimated the size of fees required for solicitors, surveys, removals and land registration. Some 58 per cent admitted they did not know what stamp duty was, but were nonetheless aware it was an extra cost they had to pay as part of a purchase.
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