The last few weeks have seen numerous policy ideas floated in the media on how to help first time buyers (FTBs).
These include the introduction of mortgages with very long-term fixed interest rates and mortgage guarantees that enable deposits as small as 1% with competitive rates.
The possible re-introduction of Help to Buy lurks in the background while there is also some scope to further reduce stamp duty costs for FTBs.
The cost of renting vs buying is a key factor
Three quarters of first-time buyers move from the private rental market into home ownership. The rest come from living with friends and family. As such, most FTBs compare their current rental costs to what a mortgage might cost per month, as well as the deposit required.
For a renter buying the home they rent today, their mortgage repayments - assuming a 4.5% mortgage rate - would be lower than or the same as their rent in all areas of the UK. In the North East, the mortgage would be a third lower than the rent.
This analysis assumes an average 20% deposit and a 30-year mortgage term. A 20% deposit was the average for UK first time buyers in 2022 according to the ONS.
What is the cost of buying the home you rent?
The table sets out this analysis, showing how monthly mortgage repayments at a 4.5% rate compare to monthly rent.
| Region/country | Value of property | 20% deposit | Rent per month | Mortgage per month (4.5% rate) | Mortgage as % of rent |
|---|---|---|---|---|---|
| North East | £109,742 | £22,000 | £672 | £449 | -33% |
| Scotland | £127,842 | £25,600 | £780 | £523 | -33% |
| North West | £152,830 | £30,600 | £831 | £625 | -25% |
| Northern Ireland | £144,310 | £28,900 | £750 | £591 | -21% |
| Yorkshire and the Humber | £150,879 | £30,200 | £782 | £618 | -21% |
| Wales | £163,914 | £32,800 | £852 | £671 | -21% |
| West Midlands | £183,308 | £36,700 | £883 | £750 | -15% |
| East Midlands | £177,970 | £35,600 | £846 | £728 | -14% |
| South West | £242,972 | £48,600 | £1,061 | £994 | -6% |
| East of England | £265,837 | £53,200 | £1,145 | £1,088 | -5% |
| South East | £300,320 | £60,100 | £1,294 | £1,229 | -5% |
| London | £519,004 | £103,900 | £2,128 | £2,124 | 0% |
| UK | £263,096 | £52,700 | £1,204 | £1,077 | -11% |
On paper this looks great news: buying is cheaper than renting on a monthly basis.
However, rising rents have eroded the ability of renters to save up for a deposit in recent years - despite faster growth in earnings. This is why many FTBs rely on family for support with a deposit.
It’s also important to acknowledge that many FTBs have bigger aspirations than buying the home they rent, which is typically a 2 bed property. Many will be looking for a larger 3 bed home where possible, which pushes the mortgage costs and size of deposit higher than shown in this analysis.
Buying with a smaller deposit pushes up the monthly mortgage costs as the mortgage is bigger and the mortgage rate will usually be higher. In the South of England - where house prices are highest - mortgage payments soon get higher than rent.
The 20% deposit can already add up to a sizeable amount, ranging from £103,000 in London to £60,000 in the South East to less than £30,000 in Scotland and the North East.
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First-time buyers have to prove they can afford higher mortgage rates due to bank regulations
An extra challenge for FTBs is that lenders are required to ensure that borrowers can afford a higher mortgage rate than what they'll pay in the first instance. In other words, buyers must be able to afford much more than the 4.5% rate we assume in these calculations.
Mortgage affordability ‘stress-testing’, as it’s called, was brought in by the Bank of England to make sure people didn’t over-borrow when mortgage rates were very low. The logic being: if people can afford higher rates, this would protect them, the wider housing market and financial system when interest rates eventually increased.
We’ve seen this in action over the last 18 months with only modest falls in property prices despite high mortgage rates.
How much can I borrow for a mortgage?
How does a 4.5% mortgage rate compare to the 8% stress-test?
Today, most mortgage lenders are testing whether borrowers can afford an 8%+ mortgage rate, even though the actual mortgage rate they will pay is closer to 4.5%.
This table uses the same calculations to show how monthly mortgage payments at a 4.5% interest rate compare to the 8% stress-test rate, and how this stacks up against monthly rent.
| Region/country | Mortgage at 4.5% rate | Mortgage as % of rental costs | Mortgage at 8% stress test rate | Mortgage stress test as % of rental costs |
|---|---|---|---|---|
| North East | £449 | -33% | £650 | -3% |
| Scotland | £523 | -33% | £757 | -3% |
| North West | £625 | -25% | £905 | +9% |
| Northern Ireland | £591 | -21% | £855 | +14% |
| Yorkshire and the Humber | £618 | -21% | £893 | +14% |
| Wales | £671 | -21% | £971 | +14% |
| West Midlands | £750 | -15% | £1,086 | +23% |
| East Midlands | £728 | -14% | £1,054 | +25% |
| South West | £994 | -6% | £1,439 | +36% |
| East of England | £1,088 | -5% | £1,574 | +37% |
| South East | £1,229 | -5% | £1,778 | +37% |
| London | £2,124 | 0% | £3,073 | +44% |
| UK | £1,077 | -11% | £1,558 | +29% |
While the FTB won’t pay this higher rate, it impacts the renting versus buying dynamics.
A renter looking to buy in London needs to prove they can afford mortgage costs that are 44% more than they’re currently paying in rent to pass the stress-test. In southern England, you need to prove you can afford in the range of 30% more than your rent, although it’s much lower in more affordable markets.
In order to reduce the impact of these affordability tests, FTBs will look to put down bigger deposits. Deposits average around 20% in the UK, although were closer to 25% in southern England in 2022.
In London, the average FTB puts down 31% of the property value as a deposit which averages £145,500. This is largely a result of trying to get the affordability dynamics to a level where they can be approved for a mortgage.
So how can recent policy proposals help FTBs with these challenges?
Long term mortgage rates fixed for up to 25 years
Longer term fixes are beneficial as they could negate the need to test the affordability of a buyer at a higher mortgage rate - this help more FTBs get on the property ladder. It would provide some boosting effect to house prices but is unlikely to create a housing boom.
The reality is, however, that the long term fixed rate mortgage market has not developed in the UK. Longer term fixed rates of 10+ years are always more expensive than 2 or 5 year mortgage rates. It’s a good idea but something that governments haven’t been able to get off the ground. The concept would need more government support to kickstart it, or it needs further innovation by banks with some examples starting to emerge.
Small deposit mortgages
Small deposit mortgages are enabled by an insurance guarantee. This guarantee protects banks from any losses that come about from house price falls. They’re attractive as they get around the deposit challenge for FTBs.
But the reality is that many FTBs do not want to put down just 1% or 2%, and lending over 95% LTV is niche in today’s market compared to history. Bank of England data shows just 0.25% of mortgages were over 95% LTV in 2023 compared to 6% in 2007.
The challenge with small deposit schemes is that affordability testing will still likely apply, even with an insurance policy to protect the bank from house price falls. You would need to be on a very high income to be able to afford a London home with a 5% deposit and pass the affordability test. I estimate this would need a household income over £150,000 so it will be far from a mass market product.
First-time buyer schemes available in 2024
What can first-time buyers hope for to help their home purchase dreams?
The days of FTBs taking on large mortgages, stretching themselves and hoping it turns out alright are well and truly over.
FTBs are taking longer to plan their first purchase and really need to save for the right level of deposit. Building more homes for sale and rent is essential to keep prices and rents in check. This in itself helps FTBs save for a deposit while improving choice for all.
We will continue to hear plans to help FTBs but it would require some bold policy moves to really open up the market. And this could just end up making homes more expensive for all.
My main advice for FTBs is to do your research and look across a wider area. This will help you find the best value for money and make sure your first home will meet your needs for the next 7-12 years.
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