We can all do our bit to help FTBs

Aspiring first-time buyers are having a torrid time but lenders, brokers and networks can all play a role in helping them get a foot on the property ladder, says Sally Laker

In June, the average first-time buyer was paying 3.21 x income to get a mortgage – the highest figure on record, according to the Council of Mortgage Lenders. This was up from 3.20 x average income in May and 3.06 x in the same month last year.

Despite this rise, the number of first-time buyers taking out new loans went up by 14% from 34,800 in May to 39,500 in June. This is the highest number of first-time buyers since December 2002 (44,000).

First-timers still account for almost 40% of house purchase transactions, according to a recent report from Nationwide. But the profile of first-time buyers has changed. In 1994, 34% of adults aged between 20 and 24 were home owners. A decade later this proportion had fallen to only 20%. It appears that affordability problems have hit traditional first-time buyers more than the top-level figures suggest.

Affordability has deteriorated significantly over the past 10 years. Mortgage payments for a first-time buyer on the average wage now account for around 42% of take-home pay compared with only around 18% in 1996. House prices have increased by more than 200% since 1996 whereas earnings have risen by less than 50%. The ability to service debt has been helped enormously by lower interest rates over this period. In 1997 base rates averaged 7.25% compared with 4.75% now.

But affordability is not only about servicing a loan. Deposit and income multiple constraints are equally, if not more, binding on first-time buyers. Since around 2002 the gap has been widening between actual earnings and the earnings required to overcome income multiple constraints. This is in spite of a significant, if gradual, increase in income multiples over the past five years. In 2001 the average joint income multiple for first-time buyers was 2.4 x compared with 3.1 x today.

But as house price inflation has outpaced earnings growth, more borrowers have been excluded. With the average first-time buyer property costing more than 130,000 a first-time buyer on average earnings would have to raise a deposit of more than 46,000 which could take up to 10 years. Even if stretched to 4 x income the required deposit of nearly 22,000 would take around five years to save. And in London the situation is even worse. It would take more than 15 years to save the required deposit of more than 100,000 and almost 12 years to save the 77,500 deposit required to meet the 3.1 x and 4 x income multiples respectively.

An increasing number of lenders are ditching multiples in favour of affordability criteria. The affordability approach attempts to assess how much cash a buyer has left each month after covering other essentials. This can help to ensure that borrowers are not overstretched and seems a sensible approach.

Shared ownership is another option for first-timers and more intermediaries should be pointing their clients in that direction. Shared ownership remains a niche option but brokers can get advice on it from the help desks of mortgage networks.