Steep house prices remain the biggest challenge for first-time buyers, who often need to save tens of thousands of pounds to bridge the gap between the purchase price and borrowing.
Despite predictions that property prices would fall following Britain’s vote to leave the EU last June, they have so far proved resilient, with Nationwide Building Society’s house price index showing that UK prices rose by 4.5 per cent in 2016. Halifax said prices were 6.5 per cent higher by the end of the year.
Annual house price growth is, however, expected to slow over the course of 2017. Although not expected to reverse, it should help first-time buyers with affordability and make it a little easier for them to build the deposits required to buy.
The average first-time buyer deposit across the UK has more than doubled from £15,168 in 2006 to £32,321 today, according to Halifax. This is no mean feat for anyone to save, let alone those in their 20s and 30s who are often on low incomes and struggling to clear student debts.
Government schemes
The Help to Buy ISA, launched in December 2015, and the Lifetime ISA both aim to help first-time buyers build deposits, boosting their savings with the help of government bonuses. These should help aspiring buyers get in the savings habit and are an important front-end addition to schemes assisting those ready to buy.
Without these schemes, there is the danger that first-time buyers give up on their dreams of owning a home altogether given the rate of housing price inflation.
Despite the challenges facing those trying to get on the property ladder, first-time buyer lending is holding up. First-time buyers borrowed £4.7bn in November, latest figures from the Council of Mortgage Lenders show, up 4 per cent on the previous month and 9 per cent on November last year.
There are perhaps signs that first-time buyers are benefiting to an extent from a reduced level of competition for property from buy-to-let landlords. Becoming a landlord is no longer as appealing as it used to be, thanks in part to the introduction of the 3 per cent Stamp Duty surcharge on additional homes introduced on 1 April last year.
Landlords have also been hit by the introduction of new stricter lending criteria from the start of this year as well as tax relief changes, which are due to be phased in from this month and will limit the amount of tax relief on mortgage interest.
Although the buy-to-let market has so far been pretty resilient there are bound to be some landlords who will either be put off from further acquisition or at least waiting for the dust to settle. Recent Council of Mortgage Lenders data pointed to a decrease in lending of 9 per cent year-on-year and most recent activity has been remortgages.
Of course these buy-to-let changes are likely to put upward pressure on rents in future, which would ironically have a knock-on impact on those already struggling to build sufficient deposits.
Any fears that first-time buyers with small deposits would struggle to access mortgage deals following the removal of the Help to Buy mortgage guarantee scheme in December appear to have been overblown.
The scheme was successful in boosting the range of mortgage options for those with only a 5 per cent deposit to put down. The guarantee helped grow the range of lenders offering deals to 95 per cent of the purchase price, resulting in a much healthier market for that type of borrower.
Lenders such as Tesco, TSB and Nationwide Building Society already offered this type of deal without using the guarantee. Others, including Santander, abandoned use of the guarantee long before its removal.
There are therefore still plenty of options for those with small deposits, and rates have come down, although not as rapidly as they have for lower loan-to-value mortgages. First-time buyers still pay more if they can only afford a 5 per cent deposit, with rates falling substantially for those able to put down a 10 per cent deposit.
The ‘bank of mum and dad’ still plays a vital role in helping many first-time buyers, with products such as Barclays’ Family Springboard and Aldermore’s Family Guarantee offering mortgages up to 100 per cent for borrowers where there is additional cash or equity as security. Others, including Family Building Society, also offer this kind of approach, plus the ability to offset family funds too.
First-time buyers still have access to the equity loan part of Help to Buy for new-build properties, which will remain until 2021. Under this part of the scheme, buyers again need a 5 per cent deposit. The government will then lend them up to 20 per cent of the value of the property they want to buy, or 40 per cent if they are buying in London. Buyers then take out a mortgage for the remainder.
New-build homes
Critics of Help to Buy argue that the scheme has propped up property prices, which ultimately does nothing to help first-time buyers. However, it has undoubtedly benefited many homebuyers wanting new-build properties from an affordability perspective. It also has the advantage of targeting new build to ensure improved supply.
Longer term, once the scheme ends, it will be interesting to see how easy it will be for today’s Help to Buy equity loan users to move without any further support.
The housing white paper has, as expected, focused on the issue of supply. The government’s Starter Homes initiative, involving properties being built on brownfield sites, has yet to make an impact, with the first houses due to be constructed this year.
The original aim was to build new properties aimed at first-time buyers aged between 23 and 40, which will be available at a discount of at least 20 per cent off the market value, with a cap of £450,000 in London and £250,000 outside. The white paper appears to be consulting on how it is applied and on applying an income cap.
Critics have suggested that, even at a discount, the price of these starter homes means they will be unaffordable for many first-time buyers. The success of the scheme will also depend on the speed of delivery of the new homes.
Life does not seem to get much easier for first-time buyers, but despite all the challenges they face, demand remains strong.
Buy-to-let changes may end up working against first-time buyers struggling to save if rents rise, but at least the Help to Buy Isa, and soon the Lifetime Isa, are working to build the savings habit.
Mortgage rates and competition are strong too, despite limited innovation in this sector of the market, so there is no shortage of deals available for those who do manage to save a deposit and can afford to buy.
Mum and dad are unlikely to disappear from the equation of likely success, however. For those without parental support or a sizeable income, unless we see a dramatic increase in supply and an easing in housing price growth, the dream of owning a home could remain exactly that.
David Hollingworth is associate director communications of L&C Mortgages
Key points
Property prices have proved resilient despite the Brexit vote.
Any fears that first-time buyers with small deposits would struggle to access mortgage deals following the removal of the Help to Buy mortgage guarantee scheme in December appear to have been overblown.
Critics of the housing white paper suggested that, even at a discount, the price of these starter homes means they will be unaffordable for many first-time buyers.
