On the face of it, the housing market looks more daunting than ever for first-time buyers (FTBs). Prices have risen strongly in recent years — far faster than average wages have — creating affordability issues for all buyers but particularly those trying to get on the first rung of the ladder, who don’t have a cushion of housing equity.
Although the property market seems to be cooling, forecasters anticipate a slowdown in price increases rather than any significant fall in prices themselves.
FTBs now also have to contend with higher interest rates — making mortgages more expensive — and spiralling living costs. Potentially this will make it harder to save for a deposit, and it could further stretch affordability calculations.
Even when mortgage rates have steadily increased for six months, it is still cheaper to buy than rent
Nevertheless, this remains a buoyant market with demand from FTBs showing little signs of dampening.
L&C Mortgages associate director David Hollingworth says: “FTB demand has remained strong despite these underlying challenges.”
The figures back this up. According to the Bank of England the number of FTBs, as a percentage of gross advances, dipped only slightly in the second quarter (Q2), falling from 24.7% in Q2 2021 to 21.4% in Q2 2022. This lower figure is broadly level with that seen in Q1 2021, which turned out to be a record year for FTB sales.
Connect mortgage director Jane Benjamin points out that, at the start of 2022, FTBs still accounted for half of all house purchases with a mortgage, while last year FTB transactions topped 400,000 — 35% up on 2020.
‘Terrifying’ rental costs
A number of factors are helping to support the FTB market. The first, and perhaps most obvious, is that rental costs are continuing to increase, which can make buying one’s own home seem more cost-effective.
Peak Money managing director Rhys Schofield describes rents in many areas as “terrifying”.
Buyers may not be aware of the consequences of making a rushed decision in order to secure the property
He adds: “The options for renting are so expensive that, even in a world where mortgage rates have steadily increased for six months, it is still cheaper to buy than rent. This means the aspiration to own your home is as strong as ever.”
Changes to the mortgage market in recent years have also helped FTBs. Hollingworth points out that, although the stamp duty holiday for home movers ended last summer, first-time relief has remained in place.
“This gives a reduction in the outlay when buying [worth up to £5,000],” he says.
Flexibility from lenders, particularly in relation to loan-to-value and affordability calculations, has helped too — as has product innovation.
Your Mortgage Decisions director Dominik Lipnicki says there has been a welcome return of higher-LTV loans to the mortgage market in the past few years.
“We have 35 lenders currently sourcing at 95%, with a total of 182 schemes, so availability seems decent for those with just a small deposit,” says Lipnicki.
We’re seeing lenders being open to using higher percentages of variable income
Mortgages for Business head of residential Neil Bishop remarks that the rates on many of these deals may be higher, of course, than those charged on lower-LTV options.
“Current 95% LTV two-year deals start from 3.69% and five-year deals from 3.79% — although these are rapidly changing in line with all mortgage pricing.”
Bishop says these rates may be higher than FTBs have paid in recent years but they remain competitive on a longer, historical basis.
“For most people these rates should still be affordable but, given rising living costs, we are seeing more applicants opt for mortgage terms of 30 years or above to make monthly repayments more manageable. This term is then reviewed at a later date when their LTV has reduced, and we can advise and refinance their mortgage on a shorter term if affordable,” says Bishop.
SPF Private Finance chief executive Mark Harris says brokers can help FTBs find the most appropriate option for their circumstances.
Far more popular than guarantor mortgages is family members gifting money to plug the gap in any shortfall with the deposit
“The pricing of products available at the typical end of the FTB market has increased, but to a lesser extent than, say, pricing on 60% LTV products,” he says.
“There are also far more products and lenders than during the height of the pandemic, meaning more options for the various credit profiles looking to buy.
“Rising interest rates and cost-of-living increases have all impacted affordability of late — leading to, in some circumstances, lower borrowing amounts being offered. There are ways to potentially boost the borrowing, and lower monthly payments — for example, longer terms and/or longer fixed-rate products — but, as with everything, there are drawbacks too.”
Parental funds
As well as higher LTVs, there has been product innovation in recent years, designed to help FTBs. Much of this has focused on the Bank of Mum and Dad, with parental funds also helping to support the FTB market.
“Lenders have long recognised that parents are an important part of many FTBs’ hopes,” says Hollingworth.
We are seeing more applicants opt for mortgage terms of 30 years or above, to make monthly repayments more manageable
He says more lenders are offering joint-borrower, sole-proprietor mortgages, and family mortgages that allow parents to include their income as part of the affordability calculations without incurring a stamp duty surcharge or potential capital gains tax liability. Guarantor mortgages are available too.
However, affordability can be tricky on some of the latter, and first-timers should speak to an adviser or broker to ensure this is the best way forward, say experts.
Harmony Financial Services director Imran Hussain says guarantor mortgages have not proved popular.
“Far more popular is family members gifting money to plug the gap in any shortfall with the deposit.”
Other brokers agree this is a common feature of the FTB market. Finanze head of regulated and term finance Imogen Sporle says 99% of FTB mortgages she has recently arranged have had at least part of the deposit gifted from family members.
Meanwhile, Lansdown Financial Services director Doug Miller points out that, if the Bank of Mum and Dad were a mortgage provider, it would be the fifth-largest bank in the market in terms of funds lent.
There are far more products and lenders than during the height of the pandemic, meaning more options for the various credit profiles looking to buy
Rising house prices have helped the Bank of Mum and Dad provide some of these funds. But Private Finance technical director Chris Sykes says, in his experience, parents often gift savings to children rather than take equity out of their own property.
A number of brokers say grandparents are helping too, with the rise in later-life lending and equity release accelerating this trend.
Affordability calculations
Brokers agree the main focus will be on affordability. Rising living costs could impact these calculations, but a change to the rules may ease the pressure a little.
Lenders now offer a degree of flexibility around this, according to Bishop.
He says: “We’re seeing lenders being open to using higher percentages of variable income, including overtime and commission for pay-as-you-earn employees, which is helping affordability.”
We have 35 lenders currently sourcing at 95%, with a total of 182 schemes, so availability seems decent for those with just a small deposit
A reduced stress test was introduced at the start of August. Harris says this allows lenders to use a lower minimum stress rate than before, which could impact affordability calculations.
“We have yet to see how this will play out in the market. But it could go some way to offsetting the challenges FTBs face,” says Harris.
Others are less sure. Bishop says: “With interest rates and the cost of living rising across the country, I can’t see this having much impact in the near future.”
Brokers too are sceptical about proposals, mooted in the Conservative leadership campaign, to allow lenders to take an individual’s rental record into account when assessing affordability and maximum lending limits.
Hollingworth says: “This has been discussed before, but the market is not going to be holding its breath as lenders would need to consider how that could marry up with the regulator’s expectations on affordability.
“However, there are more options for tenants who want their rental payments to feed into their credit profile and potentially bring positive benefits for their credit score. That’s a positive step, but it will take time to grow.”
Lenders have long recognised that parents are an important part of many FTBs’ hopes
A slowdown in house price rises may benefit FTBs, not least giving them more time to arrange finance before making an offer. Benjamin says brokers can help buyers avoid costly mistakes.
She says: “Arguably, the largest potential issue is low housing stock and FTBs going head to head with experienced buyers and buy-to-let landlords. In some cases, buyers may not be aware of the consequences of making a rushed decision in order to secure the property.
“That’s the value of an adviser: to help our FTBs understand every aspect of their property purchase, to ensure they achieve their ambition of homeownership and can then afford to keep their home.”
