There's a first time for everyone

Getting a foot on the property ladder is not easy. Stephen Pritchard offers some advice
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The Independent Online

First-time buyers have never paid more for their homes, relative to their incomes, as they do now. Figures from the Council of Mortgage Lenders show that the average first-time buyer now takes out a mortgage that is 3.24 times his or her salary. This time last year, the average first-time buyer's mortgage was just over three times' their salary. With house price growth outstripping the growth in wages, it is a trend that looks set to continue.

The average price of a house in the UK is now just short of £200,000, according to official figures from the Land Registry. In London, where the price of an average home has reached £317,679, properties cost about 10 times average wages for the city. Economists at Nationwide Building Society expect house prices to rise by five per cent this year.

First-time buyers are especially stretched. Without the benefit of capital appreciation on a house they are selling, they have to dig deeper into cash reserves in order to buy, or resort to a more expensive way of funding it.

What is driving house prices upwards?

In the short term, a healthy economy and job market are underpinning house prices. Over the longer term, low interest rates - despite this month's rise in the Bank of England base rate - make today's prices sustainable. One of the key factors behind house price inflation is the availability of property, or the lack of it.

According to the Nationwide, the gap between the number of new households being formed and the number of new homes being built has now reached 47,000 a year. This can only drive up the price of the existing housing stock.

On the other side of the equation, lenders have become more sophisticated in how they assess loan applications. This has allowed them to move away from rigid rules, such as allowing a couple to borrow three times' their salary, to more detailed calculations. In most cases, these let home-buyers borrow more.

How is this affecting buyers?

First-time buyers, in particular, are having to wait longer before stepping on to the housing ladder - so that their incomes rise - and they are having to find larger deposits, at least in cash terms.

In the late 1970s, according to statistics from the Council of Mortgage Lenders, the average first-time buyer borrowed around 2.10 times their salary. By 2005 they were borrowing half as much again. Average deposits have increased from around five per cent of the purchase price to around 10 per cent, as buyers have found that the mortgage alone does not cover as much of the asking price. The rest of the purchase price comes from savings, as well as sources such as inheritance or help from parents.

"We are seeing people renting for longer, simply because they cannot step on to the housing ladder any earlier," says Melanie Bien, associate director at mortgage brokers Savills Private Finance. "The average first-time buyer is now 34 years old, by which time they have a higher income to service the debt and are likely to have saved a deposit."

What can buyers do?

There is, unfortunately, no magic solution to the problems facing first-time buyers. But for those who are determined to buy now rather than rent, there are ways to make that step.

Taking out an interest-only mortgage cuts monthly payments, and can be a sensible strategy for buyers who expect their salaries to rise in a few years' time. They can then switch to a repayment loan or set aside cash to repay the mortgage in another way, such as through a savings account or investment.

Some borrowers are also taking a mortgage term that is longer than the standard 25 years: loans lasting as long as 40 years are now on offer. But the quickest and cheapest way to move on to the housing ladder is to boost the deposit by asking the family to help.

According to Alliance & Leicester, parents with offspring buying property in London contribute as much as £30,000 to the deposit. But at least parents who are also home owners will have benefited from the rapid price increases of the last few years.

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