THE number of first-time buyers is falling sharply, with aspiring homeowners
shackled by rising interest rates and higher property prices. Twenty and
thirtysomethings who do get a foot on the ladder are using 18.3 per cent of
their earnings to repay interest on their loans: this is the highest
proportion since 1991, according to the latest research from the Council of
Mortgage Lenders. That is happening even though close to half of all
first-time buyers have also borrowed or received cash from their parents.
No wonder that members of PricedOut.org.uk
– a website that provides a forum for the frustrated young professionals
who feel themselves barred from home ownership – are planning a
demonstration in Brighton on Sunday, the day that Gordon Brown is scheduled
to visit the town. Martin Farley, 34, who rents a room in a flat near King’s
Cross, Central London, for £500 a month, is a typical PricedOut member. His
salary is £30,000, which means that even buying in the London suburbs is out
of his reach. “The trouble with renting is you can’t make long-term plans
because at any time you could be given notice to leave,” he says. “I want
more stability and I feel I’ve been waiting a long time.” There were still
many brownfield sites, even in London, which could be used for homes if laws
forced owners to sell at reasonable prices, Martin adds. He says of
PricedOut: “We are trying to bring a note of sanity to the situation. Maybe
we are just throwing a snowball into the fire but we hope somebody will
listen.”
The figures from the Council of Mortgage Lenders are likely to put pressure on
Mr Brown to introduce new measures to make home ownership easier. On page 27
we outline the current schemes that aim to give a helping hand. But take-up
has been slow. One deterrent has been the uncompetitive interest rates on
the loans available through the Open Market HomeBuy arrangement. The lack of
effectiveness of these schemes is forcing first-time buyers to become ever
more ingenious in their attempts to secure a property of their own. There
has been an increase, for example, in buying a property – but remaining at
home with mum and dad.
That is the route chosen by Phillippa Glen, 23, who works for a building
society, and Nicholas Fish, her boyfriend, who is setting up in a business
as a landscape gardener. The couple are looking for a £110,000 house in
Newark, Nottinghamshire, for which they will put down a 15 per cent deposit.
But as Nicholas’s income fluctuates they will not be able to live there.
Instead, they will let it to tenants while continuing to live with
Nicholas’s father.
They are confident that they will be able to find tenants and so fund a
£85,000 mortgage, however much Nicholas’s income varies as the business
builds. They hope that within two years they will be able either to sell the
house or keep it as a buy-to-let while purchasing a home of their own.
Phillippa says: “We will be on the ladder and not have to worry about prices
going up. We would have liked to have bought our house to live in but we are
not in that position.”
Milly Garrow-Smith is taking her first step on the property ladder by climbing
up a ladder with a paintbrush. Milly, 19, and her mother, Jude, have been
buying houses, doing them up – while living in them – and selling them at a
rate that would leave others breathless. They’re midway through renovating
their fourth in three years and hope to sell it within months. Eventually
they hope to have enough to buy two small flats, one of which will be
Milly’s own, but think that it will be several more renovation projects
before she can achieve her own home.
“My friends spend their evenings out having a good time and I’m painting or
stripping wall-paper,” says Milly. “But I’m going to end up with my own
place.” The mother and daughter have bought run-down houses in the pretty
market town of Hexham, Northumberland – where the average price is £148,368,
according to the Land Registry – that need simple renovations. Profits have
come from those improvements because, though prices have risen so has the
price of the next property. “There is still money to be made doing this,
because most people can’t be bothered,” says Milly. “And we can do it
cheaply because we do most of it ourselves.” Their first £153,000 house cost
£13,000 to do up and was put back on on the market at £182,500. The latest
cost £84,000, plus £10,000 spent replastering, painting and replacing
laminate floors and carpets. They will not know what their profit will be
until the property goes on the market in the summer.
Milly is an estate agent, so she has to avoid buying through her employers
because of a potential conflict of interest. Therefore, she has to trawl
around other agencies, competing with other first-time buyers for the
cheapest properties with potential. “You have to be first, and that means
being on the phone and checking websites every single day,” she advises.
“It’s worth it if you get a property you can afford.” Some buyers are now
having to borrow five times their income, writes Judith Heywood
NATALIE LINTON and Anna Mitchell are impatient to become homeowners. The two
law students have secured jobs with a City legal firm that start in
September and expect to earn £35,000 each. The friends plan to look for a
two-bedroom apartment in Islington, North London, but are worried that they
may be priced out of the capital before they can afford to buy.
They will need to find £300,000 to £350,000 to buy a two-bedroom flat in
Islington, where the average property price is £407,934, up 17 per cent in a
year. They have savings but only enough to meet legal fees and stamp duty,
which will add up to £15,000. Natalie says: “The dilemma is whether to get
on the property ladder as soon as possible or to take advantage of the
interest rates at the moment and save a 5 or 10 per cent deposit before
buying. It would take a couple of years to save enough, as we would be
paying rent of about £650 a month each.”
The answer, they believe, is to buy as soon as possible, with a 100 per cent
mortgage of up to five times their joint salaries. Such income multiples
might make homebuyers from previous generations sweat, but such is the
competition to get on the ladder that many first-time buyers are forced to
overstretch. Figures from the Council of Mortgage Lenders this week showed
that first-time buyers are having to commit an average of 18.3 per cent of
their gross income to mortgage interest, the highest level since 1991.
Rising interest rates will only make matters worse.
Natalie and Anna have watched various friends buy together and have seen the
value of those properties rise. Natalie says: “Anna and I had talked about
renting together but my mother suggested we buy. Many of the people we know
have bought together, and some of them were quite unlikely pairings, but it
has worked out well. In one case, two of our friends who own together are
thinking of buying a second property.” Natalie says the consensus among
friends and family is that they should get on the property ladder as soon as
they can, however they can.
Market observers, such as the property database Hometrack, are predicting a
house price slowdown this year, but the spectre of falling prices does not
trouble Natalie: she believes that prices will continue to rise until the
2012 Olympics. But even with this assurance and a brave approach to debt,
they may not be able to buy this year. James Cotton, of the mortgage broker
London & Country, says that lenders require borrowers to be out of their
probationary period of employment, which can last for three or more months.
“There are one or two lenders who would be willing to lend this kind of
money by using affordability criteria. But just because you can borrow the
money, doesn’t mean you should: each will be taking home about £2,000 a
month after tax, and on a loan of £350,000 at 5.5 per cent that would mean
repayments of £2,200, which is a fair chunk of their combined salaries.”
Overstretching to afford a property brings other expenses, such as higher than
average interest rates. Cotton says: “Such a property would also attract
high council tax and other bills and they would likely need life insurance,
all of which would have to be budgeted for.” Natalie and Anna would be wise
to wait some time after starting their new jobs to make sure that they can
afford the repayments.
Whether to wait to save more money is a dilemma that continues to bother
potential first-time buyers. Mr Cotton says “Whether they should buy now or
save for later is a question for the buyer because without knowing where the
market is headed it is impossible to say.”
But David Bexon, of SmartNewHomes.com
, which recently launched SmartSharedHomes.com
, says that investing in a flat in Islington, near their current homes,
could prove a wise investment. “They would be buying a higher-end property,
which could appreciate more quickly than a cheaper one. In that way, it is
an investment rather than just a purchase based on need. And because they
are familiar with the area they are better placed to know about
infrastructure and the local community.”
But without equity in the form of a deposit, Natalie and Anna put themselves
at risk of having to stay in the property even if they want to move on.
Natalie says: “The problem for us is that once you are paying off a house in
London, you have a big commitment, which might make it hard to work or
travel overseas.”
For more ideas and inspiration on how to get on the housing ladder, go to timesonline.co.uk/firsttimebuyer
PURCHASING POTENTIAL
Affordability tests are used to assess how much you can borrow: your earnings
plus other commitments will be taken into account. If you want to borrow
five, or six times your income, David Hollingworth, of the broker London &
Country, says lenders will expect a deposit of at least 10 per cent. He
suggests a little soul-searching first: “Ask yourself: will I be satisfied
with just a house, or will I also need to borrow to get a car and other
stuff? Paying for all that could make servicing your mortgage debt even more
of a struggle.”
Most lenders will now accept parents as loan guarantors. But they may have to
show they can cover their own outgoings as well as those of their offspring.
A Scottish Widows deal permits parents to guarantee just a portion of the
mortgage.
Lenders will allow up to four friends to borrow together, but they take only
the two highest incomes into account. Under Britannia Building Society’s
Share To Buy scheme, each of the four can borrow up to three times their
salary.
