The impossible first rung: Mountain facing first time buyers

First-time buyers need nothing short of a miracle if they are to get their foot on the property ladder. 

It now takes young people more than a decade to save for a deposit and the number of first-time buyers has dropped by two-thirds in the last 10 years, according to a report by the Home Builder Federation (HBF).

The findings chime with recent figures from the Department of Communities and Local Government (DCLG) that reveal home ownership has dropped to its lowest level since 1987.

A generation of young people is now at high risk of being frozen out of home ownership altogether thanks to a culmination of soaring rents, a shortage of lending, stagnant wages and high property prices.

Stewart Baseley, HBF executive chairman, said: “Today’s generation have a mountain to climb if they wish to own their own home.”

Property prices

The average house price now stands at £162,245, according to the lender Nationwide, this means scraping together a deposit of thousands of pounds to have any hope of securing a home loan.

High property prices were not such a problem for first-time buyers prior to the economic crisis because mortgages were available for 100% of a home’s value.

But now lenders have reigned in their appetite and most mortgages require a deposit of 10% or, at the very least, 5%.

In some parts of the country, prices have dipped since the economic crisis took hold, which has offered buyers some hope.

Not in London, however. Thanks, in part, to foreign buyers who have seized the opportunity of a relatively weak pound to snap up property and help sustain sky-high prices. The average price of a home in the capital is set to reach £500,000 by the end of the decade, according to estimates by the Centre for Economics and Business Research (Cebr).

Generation Rent

As people have been unable to buy, a vicious circle has developed in the rental market.

Buy-to-let is booming and, in many instances, it’s at the expense of would-be first-time buyers.  The number of renters has swelled and the increased demand has enabled landlord to hike costs.

Almost a quarter of tenants now spend at least half of their take-home pay on rent, with average rents have jumping by 13.6% since 2009, according to a study by Rightmove. During the same time period take home pay has only increased by 5.4%, according to research from Cebr and Vocalink.

That’s a huge increase in costs to absorb on top of the rising cost of living and makes it that much harder to save a deposit, keeping people renting for longer still, which ensures demand for ever more costly rent.

Worse, high rents mean high returns for landlords who can afford a deposit, meaning house prices aren’t falling at the lower end of the market. And as landlords continue to use money from rent to pay off their mortgage – currently at all time low rates – they can purchase more properties to add to their empire.

Lack of Government help

The current Government knows aspiring buyers are faced with a dire situation. But it still decided against extending a break on stamp duty for first-time buyers purchasing a home for less than £250,000.

Instead, it pledged help through other avenues, most notably its NewBuy scheme. The initiative allows buyers with a deposit of only 5% to purchase a new-build home from select developers.

However, the scheme’s success is debatable. Select NewBuy mortgage must be used, which in many cases are more expensive than normal mortgages at the same level of borrowing, add the premium added to the cost of buying a brand-new property and it soon becomes apparent that this may not be such a good deal for the buyer.

The most recent figures on the scheme showed that just 250 completions had been made since it was launched.

Funding for lending little good for first-time buyers

The Government appears to have missed a trick with its Funding for Lending Scheme (FLS). The initiative gives banks cheap money on the basis that it’s passed on to consumers through lending, but no specific groups are outlined.

Since the scheme launched last August, lenders have used the money to fuel a price-war for mortgage customers with large deposits, most of whom need the least help to buy.

There are 551 mortgages currently on the market for buyers with a deposit of at least 40%, compared with 86 for buyers with only 5%, according to data from moneyfacts.co.uk.

A two-year fixed-rate mortgage for a buyer with a deposit of 40% has dropped to an astonishing low of 1.89%, offered by Chelsea Building Society, while a five-year fix has also reached a record low of 2.69%.

Meanwhile, an average two-year fixed rate for a deposit of between 5% is 5.23%. An average five-year fixed-rate is 5.56% for deposits of 5%.

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Is it going to get any better?

Sadly, it seems unless lenders relax lending criteria it is going to remain difficult for first-time buyers.

Though an increasingly popular option is mortgages where a family member or friend can act as a guarantor.

Charlotte Nelson from moneyfacts.co.uk said: “A guarantor mortgage lets either a parent or relative assure a mortgage in the event the dependent fails to make the repayments.  Rates with guarantor mortgages tend to be slightly lower than with ordinary first-time buyer products particularly at the higher loan-to-values.

“For first-time buyers having a guarantor can often mean that they are able to get on the property ladder, borrow more than the bank normally would allow and their criteria is often less harsh.”

Barclays recently launched one such scheme where first-time buyers are offered a three-year fixed rate loan, if the buyer can pull together a 5% deposit and their family simultaneously opens a savings account linked to the mortgage and put in 10% of the purchase price.