In light of the 2015 Budget announcement of a new addition to the state-backed Help to Buy scheme, Vanya Damyanova explores the options available to first-time buyers in the current market
Homeownership is the aspiration for many people in Britain. Official statistics show the number of people wanting to get on the property ladder is growing but they also provide evidence for how hard it is to succeed in that step.
The proportion of homeowners, especially younger ones, has been on the decline for the past 20 years. Homeowners give way to the growing number of renters. The private rented sector is expanding as demand for housing continues on a steady upward path, while supply is struggling to meet it.
Nevertheless, last year was one of the best for first-time buyers and the first few months of this year have also been successful for many aspiring homeowners. What this is a result of are the collective efforts to provide consumers with more options to save up for deposits, get an affordable deal and find their dream home.
The government’s Help to Buy scheme, launched in late 2013, was among the measures which have been very effective particularly for first-time buyers, as nearly 80 per cent of the homes bought through the scheme since its inception were first-time purchases.
The changes to stamp duty which came last December have also had their share of success in getting a number of people on the property ladder, as they resulted in a significant drop in upfront costs for most of the transactions.
Another boost for the first-time buyer market is coming from the record-low interest rates at the moment. In this climate, competition between lenders is growing and many are launching low-rate offers at higher loan-to-value (LTV). Over the past month several lenders rolled out new products and cut the rates on existing mortgages for borrowers with smaller deposits.
Another government plan designed specifically to help more people onto the property ladder was the Help to Buy ISA, which chancellor George Osborne announced recently in the 2015 Budget. The state-supported savings account scheme (see the infographic) will launch this autumn.
With all these recent changes now is a good time to make some calculations and see how they relate to the average UK wallet. When you know that in five years time you can have £15,000 helped by a government scheme, is that enough for you to buy a house of your own?
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Help to Buy: ISA
The new government-supported savings account designed especially for first-time buyers was welcomed by lenders, regulators and consumer organisations as a good effort and a step in the right direction to helping more people onto the property ladder.
There were also critics who said the new scheme will only exacerbate the existing housing crisis because it would help increase demand on a market where supply is already too scarce. Housebuilding should not be forgotten as a main priority and schemes for its support should also be on the agenda, the critics said.
The National Association of Estate Agents (NAEA) comments on the new scheme: “This initiative will provide a significant boost to the ability of a first-time buyer to save speedily and effectively. This is exactly what is needed to engage the first-time buyer market, particularly as we have seen the current criteria under the MMR constraining aspirations to buy a home.
It especially benefits couples who are buying for the first time as both are eligible to open a Help to Buy: ISA which potentially means £6,000 from the government bonus towards a new home. It is also timely, considering house price inflation out paces wage inflation, so this additional boost to first-time buyers savings pots will help them at least keep apace rather than fall behind the inflationary curve,” Mark Hayward, managing director of the NAEA, said.
The Intermediary Mortgage Lenders Association (IMLA) says: “Tax cuts for first-time buyers will help to tip the scales in their favour, but they can only so much without more fundamental changes to housing supply and market structures. Anyone expecting a rescue package for homeownership in the UK will still be pinning their hopes on the upcoming election manifestos to go a step beyond this kind of welcome but ultimately piecemeal reform. The Help to Buy ISA will help some households but we must guard against a situation where house prices rise faster than savings – the fate suffered by previous interventions in this area.
“Fragmented policies are not enough to fulfil the dreams of first time buyers; only a fully formed and long term strategy can turn the tide of sharply rising prices and declining owner-occupation. We fully applaud the objective to boost deposits and aid access to homeownership, but politicians must put aside the desire for headlines and cross the party dividing lines to fully address worsening affordability in many (but not all) parts of the UK,” IMLA executive director Peter Williams said.
The Building Societies Association (BSA) comments: “In last year’s Budget, the chancellor answered our call for sensible reforms to ISA rules, by scrapping the bureaucratic distinctions between cash and stocks and shares account. This year he has gone further with the Flexible ISA, and the Help to Buy ISA, the principles of which we warmly welcome.
“Given the pressures to keep the bank base rate at 0.5 per cent, the BSA pressed the government to scrap savings interest taxation two years ago. A new £1,000 Personal Savings Allowance for basic rate taxpayers shows that the chancellor has come round to our way of thinking, just in time for the last Budget before the General Election,” BSA’s head of mortgage policy, Paul Broadhead, said.
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Mortgage deposits: Basics and a few calculations
You need a deposit to get a mortgage on a property. The bigger your savings the safer and more affordable deal you can get. But how big is big enough to get you started?
The minimum size of mortgage deposit is 5 per cent of the value of the property you want to buy. Providing a 5 per cent deposit will enable you to get a 95 per cent LTV mortgage, meaning your lender will give you a loan corresponding to the rest of the property’s value.
Based on the latest figures, the average value of properties in the UK stands at around £272,000 (ONS data at end 2014). Having a minimum deposit on that value means you need £13,600 and the bank will be lending you the remaining £258,400.
Being able to provide a bigger deposit is a safer and cheaper bet for you as a borrower. Larger deposits are safer because they lower the chances of you having “negative equity”, which means you owe more to the bank than the value of your home. They are cheaper because with a bigger amount paid upfront as a deposit your mortgage repayments will be smaller.
Having a bigger stash of savings overall makes you a more credible borrower. That way lenders know you have a safety net if something unforeseen should happen such as job loss or illness.
“Buying your first property is always a stressful time. On the face of it now is a good time to buy, as rates are at an all-time low, and we are seeing a greater availability of 95 per cent mortgages – but there is no magic wand. Some lenders will restrict lending to first-time buyers, and those who have a poor credit history and small deposit won’t be best placed to take advantage of the attractive deals that we see advertised,” consumer organisation Which? comments.
The cheapest mortgages are for deposits of 40 per cent but this is a huge amount of money to have in savings and many buyers, first timers especially, are not able to scrape up a deposit of this size. The deposit amounts first-time buyers usually can afford range between 5 and 20 per cent.
Depending on where you live in the country this percentages could mean very different sums of money.
According to figures of the Council of Mortgage Lenders (CML) for the fourth quarter of 2014:
The typical loan size for first-time buyers in the Greater London region was £216,000 on a typical household income of £56,314.
First-time buyer loans in Wales stood at £100,625 in the fourth quarter, on household incomes of £31,930.
First-time buyers in Northern Ireland usually bought their homes for £80,955 in the fourth quarter of last year and the typical household income was £29,590.
The typical size of a first-time buyer loan in Scotland was £97,200 on a household income of £33,965.
Based on these figures, a 5 per cent deposit on a typical first home would be:
- £10,800 in Greater London
- £5,031 in Wales
- £4,050 in Northern Ireland
- £4,860 in Scotland
- While a 20 per cent deposit on a typical first home would be:
- £43,200 in Greater London
- £20,125 in Wales
- £16,190 in Northern Ireland
- £19,440 in Scotland
More products are available now in the 5 per cent deposit range. According to the Genworth / Moneyfacts Mortgage LTV Tracker, the number of 95 per cent LTV mortgages on the market has surged by nearly a third (29 per cent) from October 2014 (141) to January 2015 (182). In January 2014, there were only 116 such products.
It means that there are now more 95 per cent LTV products available for homebuyers than at any other time since the recession. Numbers hit a low of 43 between August and October 2013 before the Help to Buy government scheme first opened for applications.
Moreover, best buy and average rates for 95 per cent LTV mortgages have reached the lowest amount seen since the recession — 3.79 per cent in January 2015. This mirrored the downwards trend in product rates across the market as the prospect of a base rate rise by the Bank of England has faded.
The average rate for these products also dropped to a new low, to 4.79 per cent in January. This means that the price gap between 75 per cent LTV and 95 per cent LTV mortgages narrowed to 2.78 per cent in January.
The typical first-time buyer taking out a mortgage with a 5 per cent deposit on a £150,000 property still faces monthly repayments that are significantly higher (£339 or 71 per cent) than a borrower taking out a mortgage with a 25 per cent deposit for the same property.
A 95 per cent LTV loan (£142,500) would cost £816 in monthly repayments based on the latest average rate, while a 75 per cent LTV loan (£112,500) would cost just £477 a month. The difference in repayments adds up to £4,068 a year.
The two-year fixed-term cost for the 95 per cent LTV borrower is more than £8,000 higher (£8,120) than for the 75 per cent LTV borrower. This is a 71 per cent difference and despite saving £30,000 on a deposit, first-time buyers who are considering a high LTV mortgage will need to factor in significantly higher costs as a result of higher interest rates.
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