Soaring house prices have made saving for a deposit that much harder; rampant inflation and rising interest rates are hitting affordability; and we simply do not build enough suitable first-time buyer homes.
How, then, do we solve such a varied and complex web of issues?
That is the challenge undertaken by the Industry Panel for Financial Advice (IPFA), an exclusive group of leading advisory firms working closely with Sesame Bankhall Group, in a recent white paper.
It won’t surprise you to learn that we found no silver bullets. And yet despite the lack of a property panacea we found a strong desire for further creative industry collaboration to come up with new solutions to help the coming generations buy their first home.
Deposit dilemmas
According to UK Finance, the average first-time buyer deposit has grown nearly 155 per cent to £62,600 between 2005 and 2021. While 90 and 95 per cent loan to value (LTV) products continue to serve the needs of many, there are plenty of would-be borrowers for whom raising even a five per cent deposit is a challenge.
While dipping into the Bank of Mum and Dad is an option for some, how do we support those without the luxury of gifted deposits?
One option suggested was a much-needed expansion of shared ownership, a tenure which acts as a natural bridge between the social or private rented sectors into the security of mortgaged homeownership.
For those buying a 25 per cent share, deposit requirements are immediately reduced four-fold but the benefits of homeownership – including security of tenure and the potential for equity growth – are conveyed immediately.
Another idea proposed by IPFA members was a ‘split-term’ mortgage, which would see a 95 per cent LTV mortgage offered over a 35-year term with the remaining five per cent offered over a five-year term on a secured or unsecured basis.
In essence, this would allow the borrower to save for their deposit after they’ve moved into their first home, benefiting from lower overall monthly outgoings vs rental payments, and would mean they would pay off the riskiest part of their mortgage before they come to refinance.
Addressing affordability
The average loan-to-income (LTI) multiple for first-time buyers has risen from 3.09 times earnings in 2005 to a record 3.58 earnings in 2022, UK Finance data reveals. In 2021, the average UK house price was a little under nine times the average annual income.
Combine this with soaring inflation and rapidly rising interest rates and first-time buyers are facing an affordability crunch.
While acknowledging the impending changes to the affordability stress rate would help many, IPFA members believe more could be done with existing tools, such as a ‘low-start’ long-term fixed rate mortgage. This could be a combination of capital and interest and interest-only mortgage, combined with a long-term fixed rate matched to the mortgage term.
This would allow a lower initial monthly payment, a lower borrower stress rate and the certainty of a long-term fixed rate, with a tapered schedule to migrate the borrower from interest only to capital and interest as financial and personal circumstances change.
Creative and collaborative spirit between advisers and lenders needed
Of course, all lending needs to be responsible, affordable, and deliver the right outcome for customers but there are countless other avenues we could explore to support first-time buyers.
While there are many challenges to solve, we benefit from both a strong willingness to succeed and a raft of innovative ideas from which to draw.
The advice community has always worked closely with lenders and new market entrants to drive market innovation. With the scale of this first-time buyers challenge growing, the creative and collaborative spirit of the sector has never been so tested. For the benefit of the generations who follow, let’s hope we succeed.
