First time buyers are finding it increasingly expensive to get their first mortgage. Evidence from the UK Council of mortgage lenders suggests that the average cost of a mortgage for first time buyers is now £115,499. This is over 3.3 times the income of the first time buyer and this income multiple is at an all time high. The increased income multiple reflects the increased willingness of banks to lend a mortgages up to 5 times a persons incomes. (e.g. Abbey National)
The % of income spent on paying mortgage interest payments has increased to 17.9%. It used to be 15.9%. First time mortgage buyers are facing higher costs from
1. Increased interest rates (base rates now at 5.25%) Each quarter point typically adds £16 to a £100,000 mortgage
2. More people are due to pay stamp duty this year than last (due to rising house prices)
3. Increases in utility bills and council tax add to the monthly expenditure
4. Rising house prices increase the amount of deposit needed. A deposit usually needs to be 5% of the house price.
Although house prices have continued to grow; to own a house remains a significant desire for many first time buyers. In order to be able to get on the ladder first time buyers are increasingly looking at unconventional mortgages and getting help from parents e.g. borrowing money for a deposit. Despite the financial difficulties first time buyers still account for 36% of the mortgage market. This is higher than the previous year.
Bradford and Bingley Building society said that the beginning of 2007 had seen a strong performance from the housing market. The rise in interest rates had not deterred many from getting a loan. They suggest the effect of the recent rise in interest rates may be overstated. For example, real interest rates are still low (Interest rate – inflation rate. Fixed rate mortgages had already built in the expected rises, and finally people are simply willing to borrow more. The strongest growth in mortgages has come from non-conventional mortgages such as self –certification mortgages. This suggests people are wishing to borrow more than conventional income multiples. However, overall the resilience of the mortgage lending market, supports evidence that UK house prices will not fall in 2007.