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A new affordability special report from Nationwide has revealed that finding a deposit is still the biggest challenge for first-time buyers as house prices remain high. Outside of London, monthly mortgage payments relative to take-home pay remain affordable. However, trying to find a 20 percent deposit for a property is still proving to be a major obstacle with the average 20 percent deposit being 104 percent of the average income.
The latest figures are a part of Nationwide’s new annual HPI Affordability Report.
Andrew Harvey, a Senior Economist at Nationwide, said earnings growth has largely remained in line with house price growth over the years but it was at a high level.
Mr Harvey explained: “At the end of 2020, the UK First Time Buyer (FTB) house price to earnings ratio stood at 5.2, close to 2007’s record high of 5.4, and well above the long run average of 3.7.”
The report also suggested there has been a widening of the gap between the least and most affordable regions in the UK.
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Unsurprisingly, London remains the least affordable region in the UK.
Scotland has the lowest house price to earnings ratio which is then followed by northern England.
Mr Harvey continued: “One of the consequences of high house prices relative to earnings, is that it makes raising a deposit a significant challenge for prospective first time buyers.
“Indeed, at present, a 20 percent deposit is currently equivalent to 104 percent of the pre-tax income of a typical full-time employee, up from 87 percent ten years ago, although there is significant regional variation.”
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According to a chart from Nationwide, it would take the average first-time buyer almost 16 years to save a 20 percent deposit in London if they set aside 15 percent of their take home pay each month.
This drops to just over 10 years in the outer southeast and south west and nine years in East Anglia.
Meanwhile, in Scotland and the North it would take a first time buyer just under six years to save a 20 percent deposit.
Many first-time buyers have asked for help from friends or family or used inheritance to get a deposit together.
Mr Harvey added: “In 2018/19, around 40 percent of first time buyers had some help raising a deposit, either in the form of a gift or loan from family or a friend or through inheritance. This is up from around a quarter in the mid-1990s.”
While coming up with a deposit may be tricky, the good news is the cost of the typical monthly mortgage payment relative to take-home pay has been going down.
First time buyer mortgage payments based on an 80 percent loan-to-value mortgage, are at just 28 percent of the average net pay.
Mr Harvey explained: “Affordability improved significantly between 2007 and 2009, primarily due to the fall in house prices in the wake of the financial crisis, and remained low, thanks to the decline in borrowing costs to all-time lows.
“The cost of servicing the typical mortgage as a share of take-home pay is close to or even slightly below the long run average in most regions.
“However, over the past decade, an increasing proportion of first time buyers have been opting to take out long-term mortgages to further lower their monthly repayments (though this increases the total amount repaid over the life of the mortgage).
“In 2020, around 70 percent of first time buyers took out a mortgage with an initial term of over 25 years, up from 45 percent in 2010.
“Increasing the mortgage term from 25 to 35 years (which is the most common) increases the total amount of interest paid on a typical mortgage by 40 percent.”
Nationwide’s report also suggested those with “elementary occupations” such as jobs in construction or cleaners and couriers, mortgage payments are 40 percent of their average net pay.
But those in “managerial and professional roles” find their mortgage payments are lower compared with their take home pay.
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