The program proposed by the government to promote home ownership will enable borrowers to purchase a new property with a 2.5% deposit with the help of a 20% equity loan.
However, despite the fact that the deposit hurdle has been lowered, a new analysis of the scheme has found that the borrowing hurdle will remain.
This comes from Tembo, a digital savings and mortgage platform, using data from the latest First-Time Buyer Index. It has rolled out the ‘Your First Home’ model across 17 English cities and found it will make saving a deposit ‘much faster’ for aspiring homeowners.
The typical time to save drops from 34 months for a standard 5% deposit to 18 months within your ‘first home’, reducing the waiting period to over a year. Buyers in London will face the biggest discounts, closely followed by buyers in Brighton.
However, there is a big “but”. The analysis also suggests that borrowing will be more difficult.
Buyers earning the local minimum salaries would need a mortgage of more than 4.5 times their income to purchase a new, mid-build property in 13 of the 17 cities.
Even those earning the median local salary would exceed this threshold in eight cities, and the highest earners in four cities.
London is one such place. Here, a low-income earner, according to Tembo, would need to borrow 9.9 times his salary. In Leeds, the number is 8.7 times, in Newcastle 8.4 times, and in Leicester 8.2 times. Only four cities – Birmingham, Stoke-on-Trent, Liverpool and Southampton – keep low-income earners below the 4.5x threshold.
There are mortgage lenders who offer mortgages of more than 4.5 times income, but these loans are restricted and may not be an option for those with a small deposit. Buyers should also consider additional transportation costs such as transportation and surveys.
Tembo also noted that the real affordability challenge will be greater for those purchasing new rental buildings. He fears a smaller deposit will leave buyers with a weaker equity cushion from falling house prices.
The problem is with new builds
The Tempo report also raised issues, as did several other expert judgments on the scheme, in relation to the challenges caused by restricting new designs.
In fact, these homes are often more expensive, with Tempo noting that, in 17 cities, the average new build cost for a first-time buyer is £236,750 – £9,809 (4.3%) more than the average first-time buyer home. In 10 of the 17 cities, new buildings are more expensive.
Richard Dana, CEO and founder of Tempo, said: “For anyone who has spent years struggling to save, a 2.5% deposit feels like a game-changer, and our analysis shows that your ‘first home’ can shave more than a year off the time it takes. But a smaller deposit is only one part of the equation.
“In three-quarters of the cities we analysed, low-income people will still need to borrow beyond 4.5 times their income, as lending options become severely limited. The challenge shifts from simply saving enough to borrowing enough.”
Average age of first time buyer
The Tempo report also revealed how first-time buyers are older and wealthier than ever, with the average age at mortgage applications rising to 34, from 31 just a year ago.
“This raises a more difficult question: Are younger, lower-income buyers being pushed out of the market more,” Dana said.
“If Your First Home is to truly expand access to home ownership, rather than boost the purchasing power of those who can already secure large mortgages, it must address the borrowing barrier as well as the deposit barrier.”
“We would encourage the Government to build on the ambition behind Your First Home, and address the affordability challenge faced by the people targeted by the program.
“In addition, to consider how small changes to first-time buyer relief from stamp duty and the current Lifetime ISA could make existing support more equitable, helping mainstream buyers in the UK’s most challenging cities become homeowners.”
