A good time for first-time buyers - if you can afford the deposit
A drop in mortgage rates over the past few months has resulted in the average mortgage interest payment made by first-time buyers over two years falling by more than £1,300.
The average payment fell from £11,327 in the first three months of 2015 to £10,019 in the same period in 2016, according to research by AmTrust International, Mortgage and Special Risks.
This means first-time buyers – many of whom have 95% loan to value (LTV) mortgages – can now spend more of their cash on paying back the equity in their home, reducing their mortgage debt faster, as well as the total interest they will pay over the lifetime of their home loan.
- See Mortgage help for first-time buyers for information on how each of the schemes works.
First-time buyers spent, on average, 18% more in capital repayments in the first quarter of 2016 than they did in the previous year, paying back £6,391 compared with £5,407 in 2015.
Buying versus renting
The research also found that the cost of a year’s rent has risen by £300 (or 3%) from an average of £9,188 in the first quarter of 2015 to £9,488 a year later, which makes getting on the property ladder even more attractive.
Comparing the cost of paying mortgage interest with the cost of renting, it found that renting is £4,415 a year, or 87%, more expensive.
Even when you take into account both interest and capital repayment, it costs £1,282 less a year to be a homeowner than to rent, at £8,206 compared with £9,488.
Simon Crone, commercial director at AmTrust International, Mortgage and Special Risks, says: “There is a large and rapidly growing gulf in the cost of housing that favours first-time buyers over renters – providing they can get a foot on the ladder.
“Record low interest rates mean that those lucky enough to buy their own property are benefiting from lower payments, while rental costs continue to rise, penalising those unable to save enough for a deposit.
“However, many first-time buyers are unable to save deposit sums – largely as a result of high rental costs – and are therefore reliant on being able to access high LTV mortgages. It is therefore vital that we have a strong, sustainable supply of high LTV lending to support those with smaller deposits who want to buy a home,” he adds.
First-time-buyer numbers down
Meanwhile, separate analysis comparing actual first-time buyer numbers with expected demand along with demographic trends, has highlighted a drop in the number of first-time buyers who got on the property ladder between 2007 and 2015, which is 2.2 million lower than was expected.
A new report from the Intermediary Mortgage Lenders Association (IMLA), The Politics of a Rationed Housing Market, suggests that the need to save for a large deposit remains the biggest stumbling block for first-time buyers.
The report finds that government investment in homeownership – including Help to Buy Isas and the Starter Home Scheme – has not yet succeeded in boosting homeownership levels.
It says that 90,000 new home sales have been made under the Help to Buy equity loan, NewBuy and FirstBuy schemes and a further 74,000 mortgages have been completed under the Help to Buy mortgage guarantee scheme, (according to the latest quarterly Help to Buy: mortgage guarantee scheme data from HM Treasury, released March 2016), but between 2010 and 2013 (the latest year for which data is available) the number of owner-occupied homes in the UK decreased by 270,000.
More recent data from the English Housing Survey suggests that homeownership remained static in 2013-14 and 2014-15 – but there has been no sign yet of homeownership numbers rising.
IMLA’s analysis of data from the Building Societies Association (BSA) suggests one reason for a lack of interest in homeownership is that first-time buyers worry about being accepted for a large enough mortgage. In March 2016, the BSA found almost two in five (39%) of aspiring first-time buyers said that access to a large enough mortgage was one of the main blocks to buying a home – while only 34% were concerned about mortgage affordability. Almost two thirds (61%) of aspiring homeowners cited raising a deposit as the biggest barrier to homeownership.
Peter Williams, executive director for IMLA, says: “Current [government] policy is still missing the mark and failing in its objective of maintaining homeownership levels. This is partly because saving for a deposit and accessing high LTV mortgages remain ongoing challenges for first-time buyers. Mortgage repayments are cheaper than ever, but many first-timers simply don’t qualify for a mortgage as they can’t stump up the starting sum.”
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.