First time buyers in UK need bigger deposits despite Help to Buy scheme
First time buyers in the UK need a £32,000 deposit to buy their first home as average deposits rise to their highest level in a year, new research shows.
Despite Help to Buy providing those with small deposits access to high value LTV mortgages, lending is actually decreasing with the average deposit size up from a low of 16% in October last year to 20% or £31,807 now.
The analysis found June’s average deposit of 20% to be the same figure as two years ago) before Help to Buy was introduced. Factoring in house price increases over the last two years also means that in monetary terms, the average deposit has risen by 9%, or £2,557, up from £29,250.
The Genworth/Moneyfacts study also shows that current average deposit size is equal to 81% of an average first time buyer’s annual income of £39,065 highlighting the difficulty faced in saving such a substantial amount.
Across all buyers, the average LTV for house purchase loans also dropped by 2%, from 77% in May to 75% in June. An average deposit of 25% is therefore required as access to high LTV lending impacts not only first time buyers but also those hoping to move up the property ladder.
The research also shows that limited access to high LTV lending across all mortgages heightens the challenge for first time buyers in fulfilling their ambitions of home ownership. The study suggest that already a lack of housing supply is crippling the first time buyer market and making it harder for people hoping to move up the property ladder also means that typical first time buyer properties are not being freed up as often as they should.
The price gap between 75% and 95% LTV mortgages has narrowed since the start of the year as a result of lower interest rates over the last few months. In January 2015 the price differential was 71% but has since fallen to 69%.
However, this remains very high and means those who are unable to save for a larger deposit are faced with charges 69% higher than those who have access to a 25% deposit.
On an average first time buyer property of £159,053, those with a 25% deposit pay a monthly fixed payment of just £500, compared to £846 for those with a 5% deposit, a difference of £346. Similarly, the fixed term cost for buyers with a 95% LTV mortgage is £20,307 and just £12,000 for those with a 75% LTV mortgage, a difference of £8,307 or 69%.
The report says that as further evidence of the dominance of low LTV lending, the number of products available for those with larger deposits grew faster than the number of new high LTV products; the number of available products at 75% and 80% LTV rose by 280 and 200 respectively in the year to August from 580 to 860 75% LTV products, and 593 to 793 for 80% LTV mortgages. Comparatively, the number of 95% LTV mortgages increased by 42, to 192 products over the same period.
Despite slower growth than lower LTV products, the number of available 95% LTV mortgages in August is the highest amount since March 2015, when there were 195 products available.
The Best Buy rate for 95% LTV mortgages also fell by 1.55% in the year to August, down to 3.09%. This, however, is up from the record low of 2.99% recorded in July.
‘Despite record low interest rates over the past few months, the lingering price gap between 75% and 95% LTV mortgages means those unable to stump up a 25% deposit, averaging almost £32,000, face far higher monthly costs. For many, a deposit of more than 5% is simply not an option and failure to encourage lending at this level is resulting in a massive shortfall in first time buyers,’ said Simon Crone, Genworth vice president for mortgage insurance Europe.
‘Rising house prices and a lack of supply are exacerbating the situation and leave hopeful first time buyers scrambling to save a deposit as quickly as possible, before the dream of homeownership gets any further out of reach,’ he explained.
He pointed out that Help to Buy has encouraged greater availability of high LTV products but a rise in the average first time buyer deposit shows limited take up and a lack of enthusiasm to offer high LTV mortgages from many lenders.
‘While building societies in particular are doing more than their fair share in this part of the market, it requires a concerted effort and commitment from right across the lending fraternity. Help to Buy 2 is due to finish at the end of 2016 at which point lenders will no longer be incentivised to lend at this level unless a long term solution can be found the shortfall in first time buyers is set to increase,’ said Crone.
He believe that the only way to overcome this and support the ambitions of home ownership is if affordable mortgages, those requiring just 5% or 10% deposits, are made available permanently through greater use of private mortgage insurance by transferring the Help to Buy 2 scheme to the private sector.
‘Through use of private mortgage insurance, more building societies have already been able to support many first time buyers by increasing the number that are able to access 95% LTV mortgages. Before Help to Buy comes to an end, this needs to extend to banks, who are typically more reliant on the government scheme, so that access to these loans does not tail off,’ he added.