First-Time Buyers Lean Into Longer Mortgages

A decade-long slowdown in house price growth has failed to bring prices in line with earnings, with first-time buyers facing 'major barriers' to getting their first foot on the ladder.

New data from Nationwide shows that house price growth fell to 33% throughout the 2010s. This increase is far lower than the 117% average growth seen during the 2000s, but still outpaces average wage growth by about 13%.

As usual, the records don't tell the same story across every part of the UK. In London, house prices increased at twice the UK average rate- by more than 66% over the decade. Meanwhile, in parts of the North, prices crept up by just 11%, while Scotland and Northern Ireland had 'subdued' price growth of just 8% and 2%, respectively.

Simultaneously, the share of first-time buyers opting for a mortgage with an initial term of more than 25 years has risen by nearly half.

According to Nationwide, some 70% of first-time buyers switched from the default 25-year mortgage term in order to extend their repayment schedule, prioritizing lower monthly costs over the total they would spend repaying the mortgage.

On a typical mortgage, the cost of borrowing over 35 years (the most popular choice among first-time buyers) could add up to 40% to the total cost of a 25-year mortgage in interest accrued.

But the biggest challenge facing first-time buyers is in saving enough money for a deposit, says the bank. According to the bank, a 20% deposit on a typical first home now costs more than an entire year's pre-tax salary for the average worker.

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% deposit is currently equivalent to the entire pre-tax income of an average earner, up from 88% a decade ago.

said Nationwide's Senior Economist, Andrew Harvey.

Reflecting variations in house prices across the country, the average time it would take someone on a typical salary to save a 20% deposit varies by region.

In Yorkshire and Humberside, someone on an average salary who saves 15% of their take-home pay could expect to accrue a 20% deposit on a typical Yorkshire property in around six years.

For savers in the East Midlands, West Midlands, and East Anglia, saving a deposit takes on average between 7-9 years. Meanwhile, a first-time buyer in London earning the UK's average salary would have to save for 15 years to get a 20% deposit on a typical London property- up from 10 years at the start of the decade.

Even though the research points to first-time buyers in the most expensive regions having to wait years to amass huge initial deposits, Harvey believes low-interest rates have improved affordability for first-time buyers overall:

Looking at mortgage affordability, this has actually improved for prospective first-time buyers in recent years, with the cost of servicing the typical mortgage as a share of take-home pay in most regions now lower than it was in 2009, This is due to the fall in borrowing costs, with average interest rates for new mortgages falling from around 5% in 2009 to 2.4% currently.