Will this be the year of the first-time buyer?

Many of those who were scared off by the property crash are now being tempted to buy by high rents, the best mortgage deals for years and low start-up costs

Buying a house is cheaper than renting, a number of headlines claimed last year, citing the difference between monthly mortgage repayments and rents on similar properties. What the subsequent reports failed to point out was that mortgage repayments normally make up less than three- quarters of the average buyer's monthly costs. To get a real comparison, buyers must add on such extras as mortgage indemnity insurance, life assurance, building insurance, service charges, ground rent and maintenance costs.

Now, however, there really is some truth in the headline. Rents in city locations have been rising sharply. In central London they rose by an average 10 per cent last year. In outer London it is difficult to find a one-bedroom flat for less than pounds 500 a month and two-bedroom flats cost nearer pounds 800, according to Winkworth's new London Lettings Register. With ever lower fixed-rate mortgage deals the cost of buying is on a downward slope while the cost of renting is rising. At the same time, the price of traditional first-time buyer properties has remained flat. It is now genuinely cheaper to buy a one or two-bedroom flat in many city locations than to rent one. Will this be the year young renters decide to take the plunge?

Last year saw a particularly sharp fall in purchases by first-time buyers from an estimated 650,000 in 1994 to 550,000, according to the Nationwide Housing Finance Review. The fall occurred despite house prices being low. The greatest fall-off coincided with steep increases in the cost of long- term fixed-rate mortgages.

This winter, estate agents are reporting an increase in first-time buyer activity, particularly in London where so many have been committed renters. It may be no coincidence that this recovery is coinciding with the best long-term mortgage deals available in years. In the spring of 1995, fixed rates were typically over 8 per cent. Now they are more likely to be nearer 6 per cent. It seems the cost of long-term borrowing is more important to first-time buyers than the cost of the property itself.

The financial advisers John Charcol have two-year fixed-rate deals for as little as 4.65 per cent and 5.25 per cent with the Portman and Woolwich respectively. Other building societies are offering "election beaters" by which borrowers can avoid any uncertainty in rates should there be a change of government. "These are the sorts of packages which are teasing first-time buyers into the market," says Simon Checkley of John Charcol.

Increased competition between lenders and builders is also reducing the start-up costs for first-time buyers, with building societies offering to pay their legal and survey fees and builders offering help with their deposits. With quality rental properties thin on the ground and rents going up, many tenants can see the pendulum swinging towards owner occupation.

Richard and Julie Jones have moved out of a rented flat in south London into a new two-bedroom apartment at Barratt's Sovereign View development on the south bank of the Thames. With the apartment costing pounds 79,995, their mortgage is lower than their rent. Richard Jones, who works as a financial advisor, said the new home was better and cheaper. "Like all rented properties, our flat wasn't as nice as we wanted it to be and the rent we paid was effectively dead money."

During the recession the prices of homes typically bought by first-time buyers fell further than any other house type. Owners of small flats and starter homes have been the worst victims of negative equity. They paid over-the-top prices in the late Eighties only to see the next generation learn from their misfortune by choosing to rent rather than buy.

Even if those renters do decide to buy this year, it seems unlikely they will bring much relief to these beleaguered owners. Instead, they are likely to continue the pattern established during the recession of using improved affordability to move up market, buying a larger or better quality first-time home.

Carolyn and Ian Holden-Semple have just moved out of the rental market into a four-bedroom town house in the same development at Brighton Marina. They took advantage of a mortgage offer from Barratt fixed at 4 per cent for two years to buy their pounds 150,000 home. The mortgage is slightly more expensive than the rent, but they are living in a property twice the size.

One reason agents believe more couples will follow suit is because of the age profile of the rented sector. Many of those who were put off buying by the property crash are now in their late twenties and early thirties. Where they once wanted flexibility, many now favour permanence as they are looking to marry or start families.

The kinds of properties they found acceptable as newly qualified graduates may seem a little uncomfortable a few years on. If they are also expensive, owner occupation begins to look attractive by default.

Fear of unemployment is now recognised as the major break on the housing market in the Nineties and it is part of the reason so many young people have put off buying. Lenders who got their fingers burnt when prices fell have been more cautious about who they take on and less keen to offer large advances where young people have little capital.

Last year, however, there was a marked increase in the proportion of loans for first-time buyers granted at over 90 per cent of the value of the property. Simon Checkley of John Charcol said that when interest rates were 15 per cent, lenders were offering couples mortgages worth three and a half times their income. When the property crash came and interest rates fell, those offers reduced to less than three times the income, dramatically reducing the lender's exposure. Now, with interest rates still low and increased confidence that prices have bottomed out, some lenders are upping their offers. "They will lend up to four times your income if you are on a stable career path and they like the look of you," he said.