A key challenge for UK mortgage brokers today is advising the growing numbers of first-time buyers (FTBs) in their quest to get on the property ladder. As property prices continue to rise, along with the current Bank of England Base Rate, it is important for brokers to understand the modern day FTB, their needs, priorities and more importantly, the increasing trend of parental and grand parental support when factoring the cost of a first home.
A challenging time
Recent research by GE Money Home Lending reveals that 76 per cent of the UK population believe that now is the worst time for FTB affordability in the last 30 years, with 73 per cent of those questioned agreeing that it is particularly more difficult to buy these days if you are under 30.
This is not surprising given the fact that house prices have risen 1,436 per cent over the last 30 years and mortgage payments are increasingly eating into the incomes of FTBs, who must now devote 22 per cent of their annual income to mortgage payments. This compares to 18 per cent in 1997, 17 per cent in 1987 and just 13 per cent in 1977. The impact of the last decade of property price inflation is clearly being represented in the outgoings of current FTBs.
However, one thing has clearly changed over the past 30 years, and that is the help being offered to FTBs from family members such as parents and grandparents. What is important to factor in is how this impacts upon the average profile of FTB today, as clearly the arrival of financial support from parents and grandparents in the modern era puts the difficulties which young FTBs notoriously face in a new and more benign and analytical light.
Not a new phenomenon
It is not a new phenomenon for parents and other family members to help their loved ones onto the property ladder, but what has been a significant change is the increase in this trend over the last 30 years, particularly if we look at specific periods in time, starting at 1977, 1987, 1997 and the current day.
In 1977, 22 per cent of parents helped their children onto the property ladder when it came to giving them part or all of a deposit. In 2007, this figure has risen to over 30 per cent. What has also emerged in the research is the importance of grandparents for FTBs today. Back in 1977, grandparents helped just one in 100 first timers into the property market, but this has now risen to a significant 5 per cent. Given that the elderly are now enjoying longer lives than 30 years ago, this trend is surprising given the modern day costs of retirement and care.
For grandparents to be helping in such a way, when many live on minimal income already, shows that the pressures of the market are widely known and appreciated. Inheritance also plays a role, with some 7 per cent of grandchildren being left a deposit in 2007, compared to just 2 per cent in 1977, directly helping them on to an ever challenging property ladder.
However, it is not just a deposit where parental and grandparental support comes into action. Some of the largest increases where FTBs are now being given extra support, compared to their counterparts back in 1977, are for help with mortgage costs, moving costs and furniture.
It is clear that grandparents are showing more financial support these days. This is a trend set to stay at least for the short term following the Bank of England’s five quarter-point increases in interest rates since August 2006, taking the Base Rate to 5.70 per cent – its highest level since 2001.
The benefits of being single
The research also showed that family generosity tends to be more favourable to those FTBs that are single, rather than those who are co-habiting or married and that it is those buyers aged 20-25 who are more likely to get financial help compared with those aged over 30.
This is interesting, because it suggests that once children are in a relationship, family members who would have helped them financially in the past may feel that it is up to their relevant spouse or partner to provide for them or support their financial needs. However, up until this point, and while a child remains single, it is the parents and grandparents who still feel financially responsible for the FTB with 38 per cent of purchasers being helped with a deposit, dropping to 26 per cent for those that are in a relationship. Once a child moves into a relationship, the role of the breadwinner shifts significantly, as per traditional values.
Although this could be expected by some, a change in modern day thinking is that men seem to get much more help as a FTB than women. However, this again could fall in line with the traditional values where it is felt that it is more important for a man to secure a home into which he can bring a wife and children in the future.
Why help the FTB?
It is encouraging that so many parents appreciate the difficulties faced by FTBs when purchasing their first home, but even though many do help their children with a deposit, an overwhelming 63 per cent of parents said the only reason they did not help their child out with a deposit was because they did not have the finances available, rather than being of the attitude that they should purchase their home independently.
The ‘Bank of Mum and Dad’ can also be seen as a generous banking environment, with the top reason parents give for helping their eldest child get on the property ladder is because they want to rather than because they feel they have to.
Why help the FTB? According to the ‘Bank of Mum and Dad:
- It is important to me to help my eldest child buy their home – 56 per cent.
- It is impossible for a young person these days to buy a home without support from their parents – 43 per cent.
- My child could have bought a home without my financial support, but I am helping out as well – 35 per cent.
- My child was only able to buy their home because of my financial support – 18 per cent.
- I helped out as I felt it was also an investment for me – 11 per cent.
Changing dynamics
It is clear to see that the dynamics of the FTB have changed. While they are in an environment of high property prices and rising interest rates, it is important to factor in the elements that they may be able to secure in terms of financial support when advising on finances around buying their first home.
In future, it will be interesting to see if the pattern shifts. With house prices set to stay on the increase, it will remain a challenging environment for FTBs and an ever more important role will be placed upon brokers and lenders to ensure their customers buy their home in a financially secure manner.
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