Is the outlook improving for first time buyers?

Over recent years first time buyers have had a raw deal when it comes to getting onto the property ladder, with one thing after another stopping them from enjoying affordability. Many first time buyers have had to turn to renting or staying with parents or friend lately, and this is because it has become so difficult for them to get their foot onto the first rung of the property ladder.

Even when the odd affordable property does come onto the market, the unfortunate first time buyer usually gets priced out of the market by a flood of investors with ready capital to get their hands on the cheaper property.

The first thing that started to hamper the efforts of first time buyers trying to get onto the property market was the rising value of homes in the UK. Over recent years the value of properties in the UK have rocketed, rising way out of line compared to wages.

This made being able to afford to buy a home a very bleak prospect for the average first time buyers, with many having to team up with friends or family in order to be able to get a mortgage and purchase a property.

Although the rocketing value of properties affected affordability for first time buyers, who had no previous property or equity to rely on, lenders soon realised that steps had to be taken to keep the first time buyer market going.

As a result of this many lenders decided to increase their income multiples, allowing first time buyers to borrow more money in order to be able to afford to buy at the higher prices, and also to extend mortgage repayment terms, so that the loan could be spread over a longer period to make repayments more affordable on these higher multiple mortgages.

This helped some first time buyers to get onto the first rung of the ladder, albeit laden with debt. However, there was more bad news to come. Between August 2006 and July 2007 the Bank of England raised interest rates a total of five times, each time by 0.25%.

This took the base rate from 4.5% to 5.75%. First time buyers that had recently taken out high variable rate mortgages suddenly saw their repayments rocket, and those still waiting to get onto the property ladder realised that even if they did get a mortgage they would face difficulties repaying the loan at the interest rates being offered.

Towards the end of last year those still waiting to purchase a home for the first time were relieved to hear that house prices were expected to fall, and indeed research and data has shown that prices are already falling, which increases affordability for first time buyers.

There was more good news in December, when the Bank of England cut interest rates by 0.25%, with experts predicting that there would be several further cuts over the course of 2008.

However, just as things were looking far brighter for first time buyers, a number of lenders have dealt another blow that could hamper the ability of some first time buyers when it comes to getting a mortgage. This time the cause of the problem is the global credit crunch, which has affected businesses and consumers, leaving a trail of havoc in its path after sweeping across the UK from the United States, where it was sparked.

The credit crunch ash resulted in far tighter credit conditions, amongst other things, and lenders have had to really increase stringency when it comes to lending money in order to protect their profits and reduce bad debts.

A number of lenders that used to offer 100%, which have always been popular with first time buyers, have now announced that they will be reducing the number of 100% products or taking them off the market altogether.

A number of other lenders have announced that they will want a deposit of at least 10% rather than the traditional 5%, with some stating that although they will accept a 5% deposit the rate of interest on a 95% LTV mortgage rather than a 90% one would be higher.

It seems that this is now the big hurdle for many first time buyers who, based on today’s property values, find it difficult to raise more than a 5% deposit – and in some cases any deposit at all – given that they have no previous property or equity and they still have to raise the cash for other costs relating to purchasing a property, such as solicitor fees, valuation fees, and money to purchase items for the home.