20/03/18When interest rates are so low, why are millions of people locked out of buying a home?
In 1995, 65% of 25-34-year olds owned their own home.
With Bank of England (BoE) base rates above 6% at the time (Source: Bank of England (BoE)), today’s low interest rates should be a blessing to young adults.
However, just a quarter (25%) of people born in the late 80s owned their own home by the age of 27, according to research from the Institute of Fiscal Studies.
As interest rates have fallen, so has the number of middle-income, young adult homeowners.
What is holding first-time buyers back?
There are three key issues facing first-time buyers:
House prices: The average house price rose by 125% between 1995/96 and 2015/16
Income levels: Average household income increased by just 22% in the same period
Living costs: Inflation, as measured by the Consumer Price Index (CPI) means that the cost of living has almost doubled since 1995 (Source: Office for National Statistics (ONS))
So, for the average 25-34-year old, saving a deposit for a mortgage whilst:
- Paying rent
- Potentially repaying student debt
- Coping with relatively high inflation
- Dealing with stagnant wage growth
Isn’t an easy combination.
However, help is at hand.
Buying a home isn’t as easy as it used to be, but that doesn’t make it impossible. There are three possible solutions to consider:
1. Take advantage of financial products and schemes
Certain products and schemes can make buying your first home more accessible. These include:
A Lifetime ISA is a tax-efficient way to save money toward buying your first home. Each year, you can deposit up to £4,000, and the government will top up your savings with a 25% bonus.
Lifetime ISAs are available in both Cash and Stocks & Shares options. Cash ISAs are available from banks and building societies and interest is added to your savings, while Stock & Shares ISAs should be seen as investments where the value can fall as well as rise. For most people, saving for a house deposit is a relatively short-term endeavour, therefore using a Cash ISA, where there is no risk of the value falling, is probably more appropriate.
Capital saved in a Lifetime ISA is intended to be used for two purposes:
- As a deposit on your first home
- As part of your retirement income
Withdrawing money for any other reason will incur a 25% penalty, which will eat into your deposits, as well as losing your government bonus.
Saving 10% of the value of a property is one of the biggest hurdles facing first-time buyers. However, with a 95% mortgage, you only need a 5% deposit. That will still require some saving and budgeting but will be easier to achieve for most people.
95% mortgages are becoming more and more popular, with most banks and building societies offering them. Some even offer 100% mortgages – requiring no deposit.
100% mortgages often require a ‘family springboard’; that is, a lump sum covering a portion of the property value, to be available as a guarantee for any defaulted mortgage payments.
Lower deposits will often mean higher repayments and interest rates, as the bank is taking a bigger risk and the overall amount you are borrowing is higher.
Help to Buy: Shared Ownership
Shared Ownership is exactly what it sounds like. You own part of your home but pay rent on the rest. This is a good way to get a toe on the property ladder, while working toward fully owning your home.
Help to Buy: Shared Ownership is a government initiative which allows you to buy 25% to 75% of a property from a housing association and paying rent on the percentage that remains with them.
To be eligible for the scheme, you must:
- Have a total household income of less than £80,000 (£90,000 in London)
- Be a first-time buyer or no longer own property (unless you are currently in a Shared Ownership arrangement and are looking to move to a new Shared Ownership property)
Similar schemes are available for older buyers and people with disabilities.
2. Ask for help
Even with products and government schemes available to help you get onto the housing ladder, it can still seem impossible to go it alone.
If you are lucky enough to have family members who are willing to put some money toward your deposit, don’t be afraid to take them up on their offer.
It is important to discuss the terms of their offer and make sure that both parties are clear whether it is a loan or a gift. You may even want to make a written agreement to keep things running smoothly.
3. Seek financial advice
Talk to a professional about your financial situation and both your short-term and long-term goals. Not only will an independent financial adviser be able to build a financial plan and tell you about products you may not have heard of, but they will also be able to offer support and knowledge. This will give you a heightened sense of confidence in managing your finances and buying your first home.
Ready to start working toward buying your first home? Give us a call.
Your home maybe repossessed if you do not keep up repayment on your mortgage.