While the size of the first-time buyer (FTB) group in the UK mortgage market has continued to decrease over recent years, the interest and debate about how to tackle the key issues faced by FTBs has increased year after year.
The third annual Scottish Widows Bank Graduate FTB survey reported that 53 per cent of graduates are still unable to get on the property ladder. Taking a look at figures from the Council of Mortgage Lenders (CML), the number of FTBs has decreased from 531,600 in 2002 to 409,000 last year. In fact over the 10-year period from 1996, we have seen this group in the market decrease from 55 per cent of the number of annual house purchases to 36 per cent last year.
First solutions
The first solutions on the market were 100 per cent mortgages launched by lenders doing their best to make sure the FTB group kept the housing market buoyant. Last year, the government launched the Homebuy scheme and there was more indication of lenders and the government working together to come up with shared equity and key worker type schemes, along with more product innovation from lenders in the form of increased income multipliers.
Along with the efforts of these two key stakeholders in the market, the role of parents in helping their children to get onto the property ladder has become more prominent.
Before taking a closer look at the various efforts being made, it’s worth highlighting what the key issues facing the FTB group are:
A combination of factors has led to inflated house prices and problems with affordability.
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House prices in the UK have seen strong growth levels over the past few years due to low interest rates, and an increased demand for housing supply has been driven by the increase in the buy-to-let market. A key problem is that salary increases haven’t moved in line with house price growth. Between 1996 and 2006, income for FTB households increased from £17,308 to £33,994, an increase of 96 per cent. Over the same period, average house prices for this group increased from £41,906 in 1996 to £120,932 – an increase of 189 per cent.
With the average FTB property now priced at £120,932, and earnings growth lagging behind house price growth, it is little surprise that would-be home owners are struggling to save the required deposit of between 5 per cent and 10 per cent of this amount. This inability to save is further exacerbated when you take into account the fact that student debt has reached levels of around £13,000.
Scottish Widows Bank’s survey echoes the sentiment reporting that 60 per cent of graduates believe they don’t earn enough to get them on the housing ladder.
The wide-scale problem with affordability becomes apparent when looking at the CML’s figures in January this year which revealed that income multipliers – borrowing as a proportion of salaries – have reached record levels. The average FTB income multiple now stands at 3.29 times household earnings and has continued on an upward trend – a year earlier the ratio stood at 3.08, while in early 2002 it was 2.55.
Resourceful
FTBs have consequently become more resourceful in the race for their first property. An increasing number have boosted their borrowing power by buying with friends and partners. In the same survey, Scottish Widows Bank found that two-thirds of graduates who had been successful in getting on the property ladder had bought with their partner and, of that group, if they were to split up, 68 per cent would not be able to buy their other half out. This highlights the position of ‘not affording to go it alone’ that many are in.
There has also been more people borrowing or receiving gifts from friends and family to help with deposits, and other costs such as Stamp Duty and furniture.
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As affordability problems persist, there has been an increase in the number of first-timers looking for help from lenders, family and government.
In recent years, more lenders have started offering high loan-to-value (LTV) type products with some even offering up to 130 per cent of the property value. Often these products are targeted specifically at people who have degrees or in select professions, as increased borrowing is based on the higher earning capacity of these groups compared to non-graduates.
According to figures from the Mortgage Advice Bureau, at the end of 2005 12 per cent of people taking out mortgages in the UK borrowed 100 per cent LTV or more, compared to just 8 per cent in 2004. Going into 2006, in the first nine months of the year the number of mortgages above 100 per cent LTV rose by 70 per cent, proving the popularity of this type of product.
The advantage that these products bring to FTBs is the ability to buy a home without a deposit and, with additional borrowing available on top of the property prices, the ability to make home improvements, furnish the property and pay legal fees and Stamp Duty.
Even with 100 per cent borrowing, if an applicant’s salary doesn’t give them the amount they need, there is still the issue of having a shortfall. There are two options which lenders employ in these circumstances:
The first of these is enhanced salary multiples. This has become more prevalent in the market over the last year, mirroring the CML’s findings on income multiples reaching record levels. Most lenders who offer enhanced salary multiples apply qualifying criteria meaning that they are not widely available. There is normally a minimum salary level required or availability is restricted to certain professions, such as lawyers or doctors under a professional scheme.
Another attractive feature and differentiator from standard mortgages is the ability to use parental, or a close family members’ income to boost borrowing power. The role of a guarantor allows applicants to borrow more than would normally be possible by being backed up by a guarantee. This would either be for the full amount of the loan or only for the amount above the normal income multiplier.
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The key here for lenders is that the guarantor can demonstrate that, when necessary, they have sufficient resources to assist on a monthly basis. No security over the guarantor’s property is required to support the guarantee and when the applicant earns sufficient funds to support the lending in their own right, the guarantor is simply released from the guarantee and any future obligation. This is often a good way of using the ‘bank of mum and dad’ to buy without necessarily tapping into their savings for a deposit.
Changing dynamics
There is no doubt that the dynamics of the UK housing market has changed over the last few years, with FTBs and buy-to-let landlords often competing for the same properties, and the former often being priced out of competition. There are other reasons why this group has reduced – mainly a change in lifestyles making renting a more popular option.
As FTBs look for new ways of tackling the issues outlined above, there has been a move away from the traditional routes of buying a first home. We have touched on some of the tactics being employed by lenders and the government, but if the FTB problem persists there’s no doubt that parents will also play a pivotal role.
Richard Clark is head of product development and marketing, Scottish Widows Bank
