Marie Grundy - Managing Director of Residential Mortgages and Second Charges
Buying your first home has never been easy. I bought my first home in my early 20's, even then the Bank of Mum and Dad was alive and kicking. I wouldn't have been able to take my first steps into home ownership without their financial support.
But as tough as it was to get on the ladder back then, it's arguably harder now than at any time in living memory.
Ironically, when the Bank of England (BoE) started raising interest rates in December 2021, some experts thought it might be a good thing for first-time buyers.
Higher rates were expected to cool the market and, as per some estimates, knock more than 20% off house prices. That would have levelled the playing field for first-time buyers.
That didn't happen. While prices dipped briefly, they've bounced back. In fact, in November they hit a record high of more than £298,000, according to Halifax.
This puts the average house price at 8.6 times the average household income, compared to 4.4 times in 1999, according to the Office for National Statistics.
Meanwhile, mortgage costs have soared. Since November 2021, the month before the BoE started hiking rates, the average two-year fixed rate mortgage has jumped by more than 3 percentage points, adding hundreds of pounds a month to the average loan.
Unfortunately, it might be a little while before the situation improves. Savills predicts house prices will rise another 4% in 2025 and 23.4% over the next five years.
It's also difficult at this time to predict with any certainty whether first-time buyers will benefit from falling mortgage rates over the next 12 months.
While interest rates may drop to 3-4% range in 2025, the price of fixed rate loans are determined by Swap rates. And as we saw in November, a BoE cut does not necessarily translate into lower mortgage costs. Based on recent movements, you could argue that Swaps have already priced in multiple cuts next, year, potentially capping any reductions in mortgage rates.
Adding to the strain, the stamp duty nil-band threshold for first time buyers is reverting to £300,000 at the end of March, down from £450,000. This will hit first-time buyers in London and the South East hardest.
The good news is that, despite these headwinds, first-time buyers remain remarkably resilient. According to UK Finance, the trade body, first-time buyer lending was up more than 18% year-on-year in September, although admittedly from a fairly low base. That gives me hope for the coming 12 months.
Lenders can play a huge role in supporting even more first-time buyers with these challenges. While pricing is largely determined by funding costs, there are other levels we can pull, namely criteria and fees.
At West One, for example, we have introduced a range of 95% LTV products, without credit scoring, exclusively for First-Time Buyers, in addition to a range of fee assisted products designed to reduce the upfront cost of homeownership.
Competition in the low-deposit market is also key. Currently just 5% of products have an LTV of 95%, according to Moneyfacts. That leaves plenty of room for other lenders eyeing this part of the market.
We have also recently widened the eligibility criteria for our shared ownership product range, as we believe demand for this type of affordable housing scheme will increase now that Right to Buy discount has been cut.
As an optimistic, I'm confident that lenders will look to reinvigorate their first-time buyer offerings in 2025 if they see volumes dip. We all have lending targets to hit, after all.
A more supportive lending environment will leave first-time buyers in a stronger position in 2025, which would be a positive development for the market.
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