Buying your first house is always a difficult time. There are so many important decisions to make, and problems to be solved, which combine to make it one of the most stressful events that will occur in most people’s lives.
Some of the most obvious problems include the need to:
* find a suitable house to purchase
* plough through complicated financial information
* choose an appropriate mortgage that will cover the cost of the house and is within your own strict budgets
* save up enough money (usually whilst still renting another property) to cover a mortgage deposit
* deal with unfamiliar legal fees, surveys and other costs
* make a realistic offer on your prospective new home
* waiting to see if the offer is accepted
* complete the purchase
* move and get settled in the new house, with whatever decorating/rebuilding is required
Given these factors, it is perhaps not surprising that first-time buyers can be the first to get spooked by changes in the housing market.
First-time buyers (FTBs) make up an extremely important sector of the house buying market, and many analysts view them as the life blood of the whole housing market. Without them a housing slowdown or even collapse of the system is inevitable. Recent reductions in the number of FTBs purchasing houses, with Scotland achieving its lowest annual total for nine years, and the increasing struggles experienced by FTBs trying to get onto the first rung of the property ladder will have serious knock-on effects, which are already being experienced around much of the country.
National Savings and Investments (NS&I) Senior Savings Strategist Dax Harkins said: "Despite a recent cooling house market, house prices have continued to outstrip both savings rates and incomes over the last year which means potential first-time buyers need to start saving sooner and harder to get into the market."
Whilst house prices continue to increase at a faster rate than people’s incomes there will be fewer people able to afford a house.
In a recent study NS&I found that the average length of time required by FTBs, to save for a 5% mortgage deposit, ranged from five years in East Anglia, to three years, nine months in Scotland, with the average being four years and nine months, this is nine months longer than a year ago. The average age of first-time buyers also has increased, going from 37 from 31 three years ago.
The property website Rightmove has warned that the housing market could remain static for several years whilst it waits for the incomes of FTBs to catch up with the housing prices.
Miles Shipside, commercial director of Rightmove, said "As many sellers are refusing to part with gains they have made, buyers are forced to make up the affordability gap…The reality is it will take seven years of static house prices and wage inflation to bridge this affordability gap.” Marjorie Townsend, head of Edinburgh-based Lindsays Residential, says: "It was recently reported that an average home in Edinburgh costs seven times the income of the majority of nurses. This is a shocking statistic.” With over one in six FTBs turning to relatives and more high street lenders offering 100% mortgages, or even 102% from Lloyds TSB and Scottish Widows, to help buyers get onto the property ladder, some may be able to squeeze onto the first rung, but end up with long-term crippling debt in the process, fuelling the continued house prices inflation.
Various banks have come up with innovative methods to help facilitate the ability of FTBs to purchase a house which, whilst not addressing the real problem of house prices, will allow more people to own their own home.
A guarantor mortgage can increase the amount that can be borrowed, as long as the borrower’s parents have enough income to cover all their own debts, plus their child's mortgage each month; however the parent will not have to make any payments themselves unless their child’s mortgage goes into arrears.
An offset mortgage could mean that money from a parent’s savings account can be offset against their child’s mortgage. Although the parent would not receive interest on their savings, the reduction in the amount to be paid by their child could make a big difference, and they would not incur tax on the amount either.
A ‘Professionals’ mortgage is a possibility for certain workers, which allows them to borrow more than their initially low-pay career would usually make them eligible for, on the understanding that their future pay will increase rapidly as they become high earners.
Whilst some may urge for caution to prevent the possibility of building up financially crippling levels of debt, others see a need for buyers to act fast.
Marjorie Townsend, of Lindsays Residential, believes: “The best advice for first-time buyers is to move quickly …There really is nothing to be gained by waiting for a competitive closing date, which will drive the price up. There are lots of sellers out there who are eager to sell and whose particular circumstances may require a quick transaction."
Overall it seems that the situation for FTBs will continue to prove difficult unless a major change occurs that bridges the gap between income and house prices for those in most need. Recent government initiatives such as the Shared Equity scheme, that allows part ownership of property, may go some way to enabling some FTBs to start out, but Ed Davey MP, the Liberal Democrat housing spokesman, believes the policy could make housing even more expensive, "It seems to be looking at the demand side which could stoke house price inflation and make the problem of affordable housing even worse."
Until the issue of supply and demand is addressed, there will continue to be problems. According to the Barker Review, which was published in April, up to 140,000 new homes need to be built each year in the UK if supply is to keep up with demand. Even if new homes are built at this rate, the time taken to stabilise the market will mean further delays for prospective new buyers who want to own property.
Further information:
Moneynet mortgage price comparisons
House price reports
Richard works in Edinburgh for Bigmouthmedia, occasionally writing for the personal finance blog Cashzilla, and drinking too much coffee.
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