Buying a House Difficult for First-Time Buyers

By Asa Ghaffar

 According to the February 2009 Halifax House Price Index, the average cost of buying a house is now £160,327. This represents an annual fall of 17.7% with further falls expected during 2009. Home affordability has increased for first-time buyers, but high income multiples and house deposits still make getting a foot on the property ladder extremely difficult.

Home Affordability a Major Issue for Financial Services Authority

The Financial Services Authority (FSA) has come under considerable criticism for allowing the house price crash. Several lenders were offering income multiples of up to 6 times earnings making home affordability difficult. The Bradford & Bingley and Northern Rock were even offering 125% mortgages. This meant: no house deposit, instant negative equity and home repossession for many. Both banks are now nationalised.

Lower Income Multiples and Higher House Deposits for First-Time Buyers

The FSA is widely expected to make sweeping changes to the way banks lend money in order to ensure home affordability. Income multiples are likely to be capped at three times earnings. The days of 100% mortgages are now over. All first-time buyers will be expected to provide a bare minimum of a 5% house deposit, although this is likely to be higher for the forseeable future.

How Will These Changes Affect First-Time Buyers?

First-timer buyers are likely to find that it is even more difficult to get a foot on the property ladder. With the average income currently £25,000 per annum, these new income multiples limit first-time buyers to a mortgage of just £75,000. With the average house priced at just over £160,000, it is going to take a long time to save a sufficient house deposit. Many first-time buyers will never be able to buy a house.

Will First-Time Buyers Turn to Shared Ownership Schemes?

Increasing numbers of first-time buyers are likely to turn to shared ownership schemes when buying a house. Home affordability is better as first-time buyers will own a share of a property and pay rent on the other part; the percentage of a house owned can also be increased over time. This allows those buying a house to comply with FSA income multiple guidelines. A 5% house deposit will still be necessary.

The FSA hopes that these changes will promote home affordability and prevent first-time buyers struggling with mortgage repayments, negative equity and even eventual house repossession. However, critics argue that such lower income multiples will create a considerable barrier to entry for first-time buyers. All this is happening at a time when buying a house needs to be encouraged.