Clare Francis: Despite falling house prices, many first time buyers are still really struggling to get onto the market. Figures from the Council of Mortgage Lenders (CML), show that the number of first time buyers taking a home loan out in May was 57% lower then May 2 years ago.
So, Louise Cuming, who is the mortgage expert here at moneysupermarket.com, is with me just to discuss why first time buyers are facing such an ongoing problem.
Q1: Louise, given the fact that house prices have fallen - they have fallen now pretty consistently for the last 12 to 18 months - you would think it would be a great time to get onto the housing ladder because you can get on at a lower level. So why are so many people struggling?
Louise Cuming: Well, I think it is a really frustrating time for first time buyers because they see some bargains around, but there are three main reasons why they are struggling to get on the housing ladder. The first is the need for bigger and bigger deposits and you are talking about significant savings – so a minimum of £10,000 –
Q2: And we have recently done some research with people, at moneysupermarket.com, and found that the average deposit for first time buyers are needing to put down at the moment is £32,000, which is just huge…
LC: Which is just mind blowing. So, you have got the deposit side, the second thing is that the choice of products is so much smaller then it was 2 years ago, something in the region of 90% less products now then there were 2 years ago, and thirdly the eligibility criteria has got so much tighter.
So, if you take those three factors together its no wonder first time buyers are struggling, and indeed you talked about our research and from a fairly big sample of people that we spoke to, who haven’t got a house yet, only 13% felt that they had any chance in the next 12 months of getting a house.
Q3: And obviously perhaps we had reached a point in 2007 where it wasn’t sustainable and lenders were lending more then they should have been doing and more then what was responsible, so inevitably it is good news in some ways that they have tightened up, but I guess it has almost gone too far the other way now hasn’t it?
LC: Absolutely. We just need a happy medium in the middle, and you are so right, there is no doubt that money was available too readily and really there was no price for risk, so it was all relatively cheap, didn’t matter how bad your credit rating was but now we have go to the extreme that if you have only got a 5% deposit you may as well not bother. It isn’t right to say that everybody that hasn’t got a 25% deposit is going to be a bad payer but that is nearly how the lenders appear to be looking at things now.
Q4: So, what is your advice for first time buyers? Is it really aim for a deposit of sort of 25%?
LC: Well, ideally you need at least 10% deposit, so you wouldn’t even consider looking unless you have got a 10% deposit and obviously the higher the deposit after that the better chance you are going to have of a) getting a product and b) getting a well priced product.
Q5: And there are various options aren’t there for people as to how they can raise a deposit and increasingly people are turning to mum and dad to help them out – I know my dad helped me with my first flat – but one of the things that was quite worrying from our research, was that 16% of people said that they where considering taking out a loan to act as their deposit, and there are a number of reasons why that is a concern isn’t it?
LC: Absolutely, and you are right to use the word ‘worrying’ for various reasons 1, is that if the lender found out they would decline your mortgage anyway because as far as they were concerned it would be 100% borrowing, even if it was all from them, but of course unsecured loans are higher interest rates so that will affect your affordability and really that is the wrong way to think about buying a house. Unfortunately there is no easy way - it’s either having very kind parents or setting to and saving.
Q6: And the good news on the savings horizon is that, because house prices aren’t racing away, they are still falling or at best flat, you don’t have to worry that if you don’t buy now you are going to be priced out of the market?
LC: That’s a really good point, absolutely.
Q7: So take your time and save the deposit?
Q8: What about fixing versus variable rate mortgages?
LC: That’s always the $64,000 question - should I fix or not. Obviously at the moment fixed rates are at a premium so you pay a higher rate for a fixed product then you do for a variable rate product and so you could be quid’s in if rates don’t go up my caution is always to look at affordability and if I was taking out a tracker rate I would be thinking ‘what if rates went up 4 or 5%’?
CF: Which they could feasibly do in the next 2 or 3 years!
LC: They came down 4 or 5% and nobody guessed they where going to do that so equally they could go up that high, and if you can still afford it then consider a tracker rate but if that would really stretch you then go for the piece of mind that the fixed rate offers.
Q9: And there are other thing to bear in mind aren’t there, if you are getting onto the property ladder for the first time you might not fully appreciate all the costs involved, so as well as the deposit you need stamp duty, you need to cover solicitors fees, can you give a run down of everything?
LC: Oh absolutely, when you move there is the upfront costs as you rightly say of your removal van, your solicitors, your stamp duty. But once you are in the house it isn’t just a matter of being able to budget for your mortgage payment; its your utility bill, it’s the petrol to get to work, it’s all the things that when you are living at home with mum and dad you don’t have to worry about.
Q10: And also it’s your furniture as well?
LC: Absolutely. So it’s worth sitting down and doing a bit of an income and expenditure just to give yourself comfort and that you know what to expect and you are ready for what is a huge step.
CF: But it’s also exciting, you can understand why people want to own their own home, but equally do the sums and wait till you can really afford it?
LC: Yes, and I suppose on that, don’t let your heart rule your head because again when people go out looking for their first house sometimes they don’t think about the pitfalls - that it might need a new roof, it might need electrical work doing to it - they just think ‘I love this house’ so its worth doing all those investigation as well.
I’m sorry to pour cold water on it, but you do need to consider these things!
CF: Yes, I had to put new windows in my first flat, which was an unexpected expense.
LC: And we needed a new roof, so that was both of us who didn’t take our own advice!
CF: Thanks very much Lou.
LC: Okay, thanks.