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First-time buyers: can you afford the cheapest home in your area?

40% of under-35s are priced out, even if they have a 10% deposit

Research has revealed that 40% of people aged 25-34 can’t afford to buy one of the cheapest homes in their area, even with a 10% deposit. 

That’s according to a new report from the Institute for Fiscal Studies (IFS), which claims a 173% house price increase in England over 20 years has priced many first-time buyers out of the market.

Here, we take a look at the report’s key findings, and offer advice on your options if you’re struggling to get on to the property ladder.

  • For personal advice on your financial options for buying a home and help with working out a savings plan, call Which? Mortgage Advisers on 0800 197 8461.


Can you afford the cheapest home in your area?

When people talk about their struggles to buy a home, they often cite the inability to save enough money for a substantial deposit.

However, while you technically only need a 5% deposit in order to take out a mortgage, the IFS report shows that even those with a 10% deposit often struggle to buy a home.

This is because mortgage providers base the amount they’ll lend you on income multiples – typically up to a maximum of 4.5 times the total annual income of the people buying the property. So even if you’ve saved up 10% of the price of the property you want to buy, you may not be able to get a big enough mortgage to cover the remaining 90%.

In England as a whole, 61% of under-35s would have been able to buy the cheapest properties in their region with a 10% deposit and a mortgage of 4.5 times their annual income in 2016. This represents a substantial decrease from the 93% who could afford to do so in 1996.

Unsurprisingly, the figures fluctuate significantly depending on where in the country you’re looking to buy, as shown in the chart below.

Only a third of under-35s are homeowners

The research shows that home ownership levels among 24-35-year olds dropped from 55% in 1997 to just 35% in 2017.

Rising house prices have played a crucial role in this. The IFS found that the average house price in England increased by 173% (and 253% in London) over a 20-year period, while wages grew by just 19%.

The majority of these house price increases came before 2006, but even in the last decade three regions – London, the South East and East of England – have all seen notable price rises.

High loan-to-income mortgages

You might think that these figures mean that banks aren’t offering mortgages of a sufficient size to first-time buyers, but that isn’t necessarily the case.

To a degree, lenders have their hands tied, with the Bank of England’s Financial Policy Committee having told them to limit the number of loans they give out at 4.5 times a buyer’s annual income.

The data shows that, while the percentage of mortgages granted at 4.5 times income or higher is low (at 10.1% in the first quarter of 2018), this is still a significant uplift on the figures seen a decade ago.

Solutions to the housing crisis for young buyers

This data presents a grim picture for first-time buyers, as it shows that for some even a 10% deposit and mortgage of 4.5 times their annual salary still won’t allow them to afford a home in their area.

The IFS says the best way to solve these issues is to ease planning restrictions to ensure a greater ‘elasticity of supply’ – ie enabling developers to build more homes but ensuring they’re sold at a rate that’s appropriate to the market.

The report is critical of schemes such as Help to Buy. The IFS says such initiatives increase demand and push up house prices, with the added issue of benefiting some people who would have been able to buy without any assistance (for example, you don’t have to be a first-time buyer to use Help to Buy).

Ways to buy your first home

The situation is undeniably tough, but if you’re struggling to get onto the property ladder you may have options – it’s all about finding the best one for your circumstances.

In the table below, you can find out the pros and cons of popular routes to home ownership, and click the links to be taken to our full guides.

Scheme/mortgage How it works Who it helps Pros Cons
Help to Buy equity loan If you live in England, the government will give you a 20% equity loan (40% in London) for a new-build property, allowing you to buy it with a 5% deposit and 75% mortgage. In Scotland the loan is 15% and in Wales it’s 20%. First-time buyers and home movers looking to buy a brand-new property. Allows you to buy a new home with a 5% deposit. Equity loan is interest free for five years. Only available on new-build homes; you might pay an inflated price and interest kicks in on the equity loan after five years; remortgaging can be problematic.
Shared ownership You buy a share of a property (between 25% and 75%) from a housing association and pay rent on the rest. People who have some money saved but can’t afford to buy outright in expensive city markets. Household income must be below £80,000 (£90,000 in London). Allows you to buy a home with a small deposit, and you can theoretically ‘staircase’ to full ownership. You only own part of the home. Combined mortgage, rent and service charge payments can be very expensive and staircasing is too costly for many.
Starter homes initiative Under-40s are to be offered a 20% discount on market rates on new-build homes. First-time buyers between the age of 23-40. Offers a significant discount on market rates and will be funded by the government. So far, no homes have been built or sold. Homes will be on brownfield sites so may be in less attractive areas or those with poor transport links.
95% mortgage You save a deposit of 5% and get a mortgage for the other 95% of the property price. Anyone with a 5% deposit. Unlike Help to Buy, you’re not restricted to new-builds. Mortgage rates are increasingly competitive as more big lenders have started to offer these products. Big financial commitment; rates are much higher than on 90% deals (for people with deposits of 10%).
Guarantor mortgage A parent or family member acts as a guarantor on a first-time buyer’s mortgage, by using their home or savings as security on the loan. Parents looking to help their children buy a home. Allows parents to help their child buy a home even if they aren’t able to contribute a cash deposit. Financial risk for parents; relatively low number of products available and some will require parents to pay the 3% stamp duty surcharge.

Where to find advice on your mortgage options

If you’re thinking of buying your first home, it can help to get some impartial advice on your options, whether you’ve saved up enough for a deposit or not.

For a free consultation with an impartial adviser, call Which? Mortgage Advisers on 0800 197 8461 or fill out the form below for a free call back.

 

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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