The challenges facing first-time buyers

The challenges facing first-time buyers

New research has shown just how difficult life is for first-time buyers.

The figures, from the Halifax, showed that people buying their first home make up 50% of all house purchases using a mortgage.

However, despite low interest rates, life is still tough for many first-time buyers with the main problem being the capital required to fund the deposit, stamp duty and other homebuying costs.

Average first-time buyer deposit

The research showed that the average purchase price for a first-time buyer in the UK was £207,693; a record high.

That means that the average deposit, put down on a property by a first-time buyer is £32,899; equivalent to 16% of the purchase price.

Saving such a large amount of money, as well as covering the additional costs of buying a home, represents a significant challenge. Take a first-time buyer in Southampton for example, where the average annual wage is £25,604 (Source: ONS). Saving for a deposit, while meeting other day-to-day expenses, such as paying rent, will take many years.

Longer mortgage terms

Despite interest rates being at historic all-time lows, it’s clear that many first-time buyers are having to extend their mortgage term to make the repayments affordable.

Traditionally, mortgages for first-time buyers were repaid over 25-years. In 2007, before the housing crisis, 38% took out loans of between 25 and 35 years; stretching the term to make the repayments more affordable. However, following a sharp rise on house prices since the end of the financial crisis, now over half (56%) of first-time buyer mortgages are arranged with a term of 25 – 35 years.

Not all bad news for first-time buyers

  • Despite rising house prices, there is some good news for first-time buyers:
    Interest rates remain low, and show no sign of increasing significantly, in the short-term at least
  • Buy to Let purchases have halved (Source: Council of Mortgage Lenders); good news for first-time buyers who often compete with investors for the same property
  • Employment, a pre-requisite for getting a mortgage, remains at record levels

Tips for first-time buyers saving for a deposit

The biggest challenge for first-time buyers seems to be saving for a house deposit; research from the Nottingham Building Society shows that 35% of all first-time buyer purchases fell through last year because they couldn’t find a large enough deposit.

The average price paid for a typical first-time buyer terraced property in Southampton is £228,936 (Source: Zoopla). Taking the average deposit of 16% that means finding over £36,000 plus paying a Stamp Duty bill of £2,079. Other fees, such as legal costs, valuation fees and removals could well push the bill close to £40,000.

So, how can first-time buyers meet that challenge?

1. Buy a smaller property

We all want our first home to be perfect. But the harsh financial realities might mean you can get on the housing ladder more quickly if you dial back your expectations and buy a smaller property.

A lower purchase price will mean a smaller deposit which may allow you to buy sooner than you previously thought. Sure, the property will be smaller, but the sooner you buy, the sooner you stop paying ‘dead money’ in the form of rent.

2. Take mortgage advice

While the average deposit put down by a first-time buyer might be 16% of the purchase price, there are mortgage lenders who require a far lower deposit. Some only require you to put down 5%.

A mortgage broker experienced in advising first-time buyers will help you understand the options available. Many of which you may not have previously considered, from lenders you had never heard of!

3. Save harder and for longer

Again, this may sound obvious, but the harder you save, perhaps even making short-term sacrifices such as skipping holidays, or taking a second job, will help you build up a deposit more quickly.

4. Government schemes

There are two key Government schemes designed to help you save your deposit; the Help to Buy ISA and the Lifetime ISA.

The main advantage to using these is that the Government will top-up your savings, helping you reach your target sooner.

The top-up comes with strings attached though and you should choose carefully between the two options.

You can read more about the differences between the Help to Buy and Lifetime ISAs by clicking here.

5. Help to Buy

The Government’s Help to Buy schemes extend past the ISA.

Help to Buy: Shared Ownership gives you the chance to buy a partial share in a property (between 25% and 75%) with the opportunity to buy more as you can afford to do so.
There are restrictions though and you can read more about Help to Buy by clicking here.

6. ‘The Bank of Mum & Dad’

Research from Legal & General shows that the ‘Bank of Mum & Dad’ is set to led £6.5 billion this year; an increase of 30% on last year. In fact, if it were a traditional bank, it would be the ninth largest lender in the UK.

The average ‘withdrawal’ from the ‘Bank of Mum & Dad’ is £21,600 with most of the help being given to first-time buyers.

If you are fortunate enough to have parents who can, and are willing, to help you, care should be taken to ensure everyone is happy. Fundamental questions such as whether the money is a gift, or a loan, need to be answered. While the parents parting with the cash need to consider the effect it will have on their future financial plans.

7. ‘The Bank of Gran & Grandad’

Figures from Santander show that around 10% of first-time buyers, up from just 2% five years ago, are now getting help from grandparents.

With Pension Freedom now allowing far more flexible access to pensions for people over the age of 55, it’s perhaps unsurprising that more and more grandparents are helping out. In fact, recent research from the Financial Conduct Authority (FCA) shows that most people taking money from their pension aren’t retiring. Many of those will undoubtedly be taking money to help their grandchildren climb on board the property ladder.

While the heart will no doubt want to help, it shouldn’t overrule the head. Any grandparents thinking of using their pension to help their first-time buyer grandchildren need to make sure they are not harming their own financial future. Thorough, and careful planning, is needed on all sides.

First-time buyer mortgage experts, here to help

If you are a first-time buyer in Southampton, Portsmouth, Winchester or the surrounding area we are here to help.

Our independent mortgage advisers are experienced in helping first-time buyers get on to the property ladder. We have access to a wide range of mortgage lenders, many of whom have schemes aimed at first-time buyers struggling to build up large deposits.

We’d love to hear from you, please call us on 0800 612 8099 to speak to one of our team, or complete our online enquiry form by clicking here.