It’s very difficult for first-time buyers to take that first step on the housing ladder at the moment, for a few reasons.
The first is obvious and a long-term problem – house prices.
Halifax data shows the typical first-time buyer house price has risen from £142,473 in 2010 to £241,025 this year.
And it’s even more stark in London, where prices have risen by 98% in a decade to £463,536.
Secondly the stamp duty holiday means non-first-time buyers and investors have been given more of an incentive to buy, meaning first-time buyers have more competition.
Thirdly, and arguably most significantly, the COVID-19 pandemic has spooked lenders from granting mortgages for those who want small deposits.
As Alan Cleary, group managing director at OneSavings Bank for mortgages, said: “The withdrawal of 90% LTV mortgage deals from the market may see confidence waver at the bottom end of the market, particularly for first-time buyers and those with smaller deposits however there are still deals to be made.”
Stamp duty holiday
There’s been a lot of talk about the government’s stamp duty holiday, which was introduced in July and will run into March 2021.
While it technically shouldn’t make it harder for first-time buyers, it evens the playing field between them and other types of buyers, including investors.
First-time buyers were given stamp duty relief back in 2017, which abolished the tax up to £300,000 and made it 5% between £300,000 and £500,000 – and there are plenty of first-time buyers looking to buy properties in that price point.
Now however, with stamp duty being cut up to £500,000 for every type of buyer in the UK, with the exception of investors in Wales, that advantage has been eroded.
More information on the stamp duty holiday: https://www.contractormortgagesdirect.co.uk/news/finance/stamp-duty-holiday
Loss of high LTV mortgages
Options for buyers looking to buy with a 5 or 10% deposit are sparse.
Moneyfacts data shows that only 79 mortgages are available for those looking to buy with a deposit of 10% or less, a dramatic fall from the 1,172 recorded in September 2019.
Mortgage brokers are overwhelmingly searching for mortgages with small deposits for their clients, according to data from Knowledge Bank. For six months our nation’s brokers have searched for ‘temporary maximum LTV restrictions’ more often than anything else, so clearly there’s a desperation for low-deposit mortgages.
Reflecting on the situation, Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “The demand for mortgages continues to be strong as borrowers take advantage of some competitively-priced deals, particularly those with big deposits to put down. For first-time buyers, the situation is trickier with less choice of high loan-to-value products and advice is more crucial than ever.”
In September some lenders made it even harder for mortgage borrowers, by slashing the maximum amount they are willing to lend based on a buyer’s income.
Barclays for example has cut its loan to income multiple for all residential cases from a maximum of 5.5 times to 4.49 times.
This factor means that even buyers who earn a lot could find it tough to buy in the current climate.
Saving for a deposit
With lenders now expecting a bigger deposit, clearly saving is the name of the game.
However, renting can be expensive depending on where you live, making it harder to save.
For example, Spotahome research found that over three quarters (76%) of the average monthly wage is required in London to cover the necessary costs of living in the capital.
With this being the case, it’s no surprise that there’s talk of the Bank of Mum and Dad having a big role to play in the market. How else can the majority of potential first-time buyers save up enough?
Legal & General has suggested the Bank of Mum and Dad are the key behind the market’s recovery after COVID-19.
Regions to buy
With all this in mind, potential first-time buyers might be forgiven for giving up on their dream of homeownership.
However research from Compare My Move, a company which connects home movers with conveyancers, highlights how it’s far easier to buy in certain regions.
According to the study it’s easiest to buy in Birkenhead in the North West of England, where the typical house price is £109,041, compared to a median salary of £24,172.
That means coming up with a 15% deposit costs £16,356 – which seems affordable when you compare it to a location like Guildford in the South East, where a 15% deposit will set you back £84,190.
Other affordable areas include Hartlepool, St Helens, Bradford and Barnsley – so seemingly head north to buy a home for less.
The government has also released a potential olive branch for buyers, as it looks to reform shared ownership.
As it stands buyers of shared ownership properties have to buy a 25% stake in the home from a housing association, paying rent on the rest. If you want to own a bigger proportion of the property you can purchase more of it in instalments of between 5 and 10%.
Once the changes come into force however you can purchase a 10% stake, and buy additional shares in the property via 1% instalments.
Help to Buy
While Help to Buy isn’t the perfect scheme, it should be mentioned as a solution, as it enables first-time buyers to use a 5% deposit so long as they purchase a new build.
New builds aren’t without risks, as they can incur a premium in price, however their values tend to rise in the long run.
There are new properties coming to market that are eligible for the scheme, so this may be an opportunity for those who can’t or don’t want to stump up a bigger despot.
The current situation is very difficult for first-time buyers due to numerous factors.
With all the struggles discussed, The Resolution Foundation has called targeted government support for first-time buyers to support their incomes.
For now, they’ll have to make do.
For those who want to buy with a small deposit it may be worth getting in touch with a broker. That way you can be the first to know if and when lenders launch more deals for those who can only come up with a small deposit.