First-time buyers (FTBs) are continuing to face an uphill struggle to get on the property ladder.
In February, the British Bankers Association (BBA) reported a drop in the number of FTBs, which fell to a two year low. This re-affirmed earlier data from the Council of Mortgage Lenders (CML) which showed that the demand from FTBs had waned. In the four years to 2006, the CML reported that the number of FTB loans dropped by over 120,000, from over 500,000 in 2002 to 410,800 in 2006.
These latest figures from the BBA come on the back of the shock interest rate rise in January and reports that the average house price rose above the £200,000 mark for the first time.
In the past six months alone, we have seen the Monetary Policy Committee increase Bank Base Rate on three occasions. This, coupled with the rise in house prices, energy and fuel costs, means borrowers, especially young people who are burdened with student loans and bank overdrafts, are fearful and unable to buy a property.
Problems and options
One of the main problems FTBs face is saving for a deposit. There are still people who are not willing to compromise their lifestyles to save when looking to buy a house. On the flip side, there are others who are limited on the amount they can save by the total of the rent they are paying.
One option FTBs have is to move back to the family home or to move into cheaper rented accommodation to reduce their outgoings. Many young FTBs have, until recently, been turning to their parents to fund their deposit but recent research suggests that the tide is turning and more FTBs are going it alone.
Without a doubt, the key issue to come out of the FTB issue is affordability. Increasing house and energy prices along with interest rate hikes have put property out of reach for many potential buyers. As concerns around affordability have grown, confidence levels of FTBs have dropped. As a result of this, lenders have introduced affordability calculators to help determine the amount potential borrowers can take and as young borrowers become more aware of the workings of affordability models and the benefits associated with these, confidence levels should rise again.
FTBs must shop around and look at the various mortgages on offer and the lenders available to ensure that they are choosing the right product for their needs. It is also important that FTBs look beyond the high street and become open to the products being offered by specialist lenders.
To assess affordability, many lenders are now using automated valuations that determine how much FTBs can borrow without over-burdening them. However, until borrowers are fully aware of such models, affordability remains a heavy weight on the minds of many.
Therefore, lenders and brokers need to work together to provide borrowers with essential information on the tools, products and services available to them. A rise in the use of affordability calculators means that customers will be borrowing an amount they can afford, which should decrease the number of people struggling to make their repayments.
Challenges nothing new
Home ownership is closer than FTBs think. We need to ensure FTBs are aware of all the options and reassure them that affordability is a priority for lenders and borrowers alike. This, along with stable rates, should help retain confidence in the market.
After all, challenges for FTBs are nothing new. In 1990, FTBs were facing interest payments of 27.1 per cent of their income, compared to 16.8 per cent in 2007, according to data from the CML and in 1998, the Base Rate stood at 7.50 per cent, 2.50 per cent lower than the current rate.
But today, as a result of the innovative thinking of lenders, borrowers have a wider choice of products and criteria available to them.
Last month, Mortgage Advice Bureau revealed a 50 per cent increase in the number of FTBs taking out loans in excess of 100 per cent loan-to-value during 2006, compared to 2005. There was also a 21 per cent increase in the number of people taking out 100 per cent loans.
The research also found that some FTBs were opting to take out a 100 per cent loan so that they could use saved capital to fund additional costs such as furniture, which is something lenders should take into consideration when calculating affordability. It is important that FTBs are made aware of the details of 100 per cent mortgages and the additional costs.
According to Moneyfacts, there are 155 100 per cent home loans on offer and the increased competition may bring good news to borrowers.
FTB future
FTBs are increasingly looking to support themselves when making their move into home ownership. Gone is the desire to seek help from parents and so affordability will continue to be a priority issue. Not only are we facing further rate hikes, but house prices are rising, and this, combined with fuel and energy costs, contributes to the affordability problem.
The quicker FTBs become aware of affordability and the variety of products available, the quicker confidence will return in the sector.
