Risks to first Time Buyers in the UK

It is a long held British view that an ‘Englishman’s home is his castle’ and becoming a home owner has been a traditional aspiration of many. Each generation sees a new round of first time buyers enter the market, with home ownership being one of the highest levels in Europe at 70%. The biggest problem in the UK housing market today is that these traditional first time buyers have now been priced out of the market. The risk facing first time buyers is that their aspirations to become home owners may remain just that. They could be the first generation unable to make that first step onto the property ladder.

It is not house prices alone which is preventing first time buyers from entering the property game. Available finance is simply no longer there, and the types of mortgages which allowed previous generations to become property owners despite rising prices have been withdrawn. The latest boom and bust cycle has lead to far greater regulations imposed on mortgage lenders by the Financial Services Authority. The types of product which were previously made available spoke volumes about irresponsible lending, which many first time buyers took up as the only means to get a foot on the property ladder.

Years ago first time buyers would save up for a deposit on a house, and borrow an agreed multiple of their salary. The typical mortgage was a capital repayment one, which was a certain way of repaying the loan, generally over 25 years. However the introduction of interest only mortgages, 95% and even 100% mortgages, high multiples of salary and longer terms, all contributed to the problems we see today. High levels of borrowing with a low or no deposit, inevitably lead to negative equity if house prices fall.

Those who take mortgages without having equity are often struggling to make the repayments before the ink is even dry on their paperwork, and are left facing repossession if interest rates rise or they fail to budget prudently. Today first time buyers who do make it onto the property ladder are considered high risk by lenders, thus face higher mortgage rates. 8 out of 10 first time buyers in the last year have funded their deposits, which now average £34,000, from the bank of Mum and Dad.

The average age of the first time buyer is now 37. Those who are considering buying are not necessarily the traditional first time buyers, but those who are buying with others in the same predicament of not being able to afford a deposit.

Buying with friends is an option which could prove risky as there may not be any first time buyers to buy their property when they decide it is time to move on, and can afford to buy individually, or with a partner. They could well end up trapped in their properties, with some selling their share to strangers who then move in with one of the original first time buyers. It could all get quite messy with few first time buyers to stoke the traditional chain.

The biggest risk to first time buyers is that they could well remain merely aspirational buyers left out in the cold. The prospect of saving for 15 years to pay a deposit will lead many to give up their hopes and settle for renting. Even if house prices drop substantially obtaining a mortgage may well remain difficult for all but the wealthiest.

The Council of Mortgage Lenders feel restricted by too much regulation and believe the aim is to squeeze debt out of the mortgage market. If they are proved correct then mortgage finance will remain in decline and funds will be directed to another market. It remains to be seen if the latest bust will actually see an end to the first time buyer.

Sources: The Council of Mortgage Lenders

                The Economic Journal