With the level of first-time buyers falling to an all-time low of 18 per cent in the UK, Peter Gladdy looks at this growing problem and warns that it may soon cause the market to draw to a halt
With house prices rapidly rising across the UK by 46 per cent since 2001 and the average first home worth £125,000, first-time buyers are finding it near impossible to step onto the property ladder.
This growing problem is clearly reflected in the first-time buyer level in London, which has fallen by over 10 per cent in the last year. First-time buyers form the foundation of a healthy housing and mortgage industry and if they are unable to buy, the market will quickly draw to a halt.
Taxing times
As well as rising home prices across the UK, first-time buyers also have to contend with extra costs, for example our Chancellor’s stealth stamp duty tax.
This topic has had a lot of interest in the past few months with the Chancellor recently paying lip service to his critics. Mortgages Direct believes the decision was a total cop-out as it is virtually impossible to purchase a property at £120,000 in many parts of the UK.
More recently, the Conservatives’ announcement that it would raise the level of the threshold to £250,000 is a welcome respite. However, the devil is in the detail and we would want to see the full proposal before we fully welcomed the intended change.
Raising the threshold to £250,000 seems too high as the average home is around £162,000. The sensible answer would be to increase the starting threshold to £180,000 and for payment to be made on a graduated scale, for instance a home that is valued at £185,000 incurs duty on £5,000.
Affordability, affordability, affordability
However, despite rising house prices and extra costs, interest rates are historically low and there are some excellent deals for first-time buyers.
The key criterion for whether a buyer is ready to step onto the property ladder is if they can afford the repayment costs, rather than being able to raise sufficient deposit and ancillary costs.
Young people are now paying large rents, while the monthly repayment for a mortgage on an equivalent property is likely to be less. It makes every sense for them to start paying off their own mortgage rather than lining their landlord’s pocket.
There are a rising number of mortgage lenders addressing affordability issues rather than sticking to traditional income multiples of three and four times salary, but we believe more can be done.
HSBC is one such lender that fairly recently introduced a first-time buyer mortgage that is not only linked to affordability but also innovatively ties in the first two years of a fixed rate mortgage to an interest-only calculation and then automatically, without additional cost, switches back to a repayment basis.
This enables the purchaser to significantly lower their mortgage payments in the first two years but also, as affordability is calculated on a repayment basis, protects them from payment shock.
But as the HSBC scheme is not widely available, it has resulted in the inherent danger of brokers, not lenders, trying to emulate this scheme. An increasing number of mortgage brokers are selling interest-only mortgages on the pretence that borrowers can switch after a few years to repayment deals.
However, this process is not monitored closely enough and more often than not the borrower is forgotten and left on an interest-only basis, with no method of final repayment, over and above the original period agreed. The borrower may also incur charges if they wish to switch to a repayment deal.
Don’t keep them in the dark
Mortgage brokers need to start being more proactive in informing potential first-time buyers of the wide range of mortgage deals available.
There is currently a plethora of first-time mortgage products and many potential new buyers are unaware of the wide range of options on offer.
Mortgages Direct, alongside Spicerhaart, is currently rolling out a series of initiatives to help promote the mortgage options available to first-time buyers.
These include a marketing campaign promoting mortgage deals available, as well as exclusive offers to reimburse part of the upfront costs for purchasing a home.
The mortgage industry is currently buoyant but this is only thanks to the surge in remortgaging and the buy-to-let sector. But the long-term health of the industry is reliant on the flow of first-time buyers.
Although house prices have soared throughout the UK, there are some great mortgage deals for first-time buyers with very affordable repayments. It is our responsibility to ensure first-time buyers know their options.
Peter Gladdy is director of Mortgages Direct
