Stunting FTB growth

The Council of Mortgage Lenders (CML) has once again highlighted the financial struggles faced by first-time buyers (FTBs) in the mortgage market.

Despite the CML indicating a continued overall buoyant mortgage market, it admitted that the issue of affordability, particularly for FTBs was a concern that had to be resolved. Data from the trade organisation revealed that income multiples for FTBs reached their highest ever level, 3.24 times average income during the month of July.

FTBs interest payments as a percentage of their income also increased to 16.7 per cent, rising for the fourth consecutive month, the CML regulated mortgage survey (RMS) revealed.

Combating the affordability issue

In past months, to combat the issue of FTB affordability, lenders have adopted graduate, FTB only products and 100 per cent products in an effort to tempt aspiring buyers into the market. However, with affordability continuing to rise, at a steeper rate than house price growth, which continues to rise, the FTB market looks bleak. Indeed, as was revealed by HSBC, many FTBs resort to purchasing properties with family or friends in an effort to make the first step onto the property ladder.

Carina Kemp, head of mortgages at HSBC, admitted that FTBs had been forced to adopt new strategies to realise their house-owning dream. She said: “The average house price in England and Wales now stands at almost £200,000, which is over six times the average salary, but home ownership is as popular as ever so FTBs are thinking more laterally about how to get on the ladder.

“At HSBC we have seen a 50 per cent increase in group mortgage applications this year alone. More and more people are getting round high property prices by clubbing together with friends or family to buy a home.”

Michael Coogan, director-general at the CML, said: “FTBs are continuing to find ways of getting a toehold on the property ladder, showing just how popular home ownership is to many young people. But higher income multiples, coupled with higher interest payments as a proportion of income, suggests they are continuing to stretch themselves to do so.”

He added: “It is essential FTBs, and all borrowers, look at their finances to ensure they are taking sensible steps to ensure their debts are manageable, especially as the markets are expecting a further interest rate rise later this year.”

Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors (RICS), also expressed his concerns over the issue of affordability for FTBs. Commenting on the Department for Communities and Local Government (DCLG) July house price figures, he said: “House price rises for first-timer properties fell back in July but at 5.6 per cent is still running above average wage rises, increasing difficulties for would-be buyers to get a foot on to the housing ladder.”

Undergoing change

The CML indicated that the average FTB mortgage was £110,500, with the decision by the Monetary Policy Committee (MPC) to raise the Bank of England Base Rate by a quarter of a per cent, leading to an additional £17.40 per month being paid towards mortgage payments.

The CML in its July study also predicted that income multiples and the proportion of income used to service mortgage interest would rise in the coming months, reflecting the Base Rate decision. With industry commentators speculating a further Base Rate rise in November, the FTB market will have to undergo further change to respond to the needs of aspiring wannabe buyers, while aspiring FTBS will have to continue looking at other avenues, such as buying with friends, to step onto the property ladder.

While the CML painted a bleak picture of the FTB market and its immediate future, the CML indicated that borrowers were beginning to realise the benefits of tracker loans. Its July study revealed that the proportion of new borrowers opting for tracker loans reached 23 per cent, or 44,600 loans. Fixed rate deals continued to be the most popular mortgage, but decreased in popularity amongst borrowers. As a result of increased product pricing, bought on by the Base Rate decision, fixed rates fell in popularity, from 68 per cent of all loans, to 65 per cent, accounting for 127,300 loans during July.

As a result of the upwards pricing of many products, the CML also indicated that the average interest on a fixed rate loan reached 5.11 per cent, up from 5.06 per cent June, representing the sixth consecutive pricing increase.

Hindering the future

While the CML paints a picture of a busy market, there is no doubt that factors are hindering the future progress of the sector. While a further Base Rate rise is widely predicted, the only outcome can be a continued rise in the average interest of a fixed rate loan, while tracker and discount products might see resurgence in popularity.

However, as the CML study indicates, the main concern remains the issue of FTBs and affordability.

While lenders are adapting strategies to increase FTB numbers within the market, rising house price costs will remain a hindrance for many keen to enter the market.