2019: The Year of The First-Time Buyer

According to figures recently released by UK Finance, the number of mortgages given to first-time buyers rose to 370,000 in 2018, up 1.9% on the previous year.[1] This is the highest level this figure has reached in twelve years, and seems to herald the end of a first-time buyer crisis that has resulted in the number of 20-34 year olds living with their parents rising to 3.4 million in 2017 – up from 2.4 million in 1998.[2] Despite this, however, the fallacy of the unaffordability of first homes remains widespread, with Phillip Hammond recently unveiling a new initiative with which he hoped to “restore the dream of homeownership” to first-time buyers. This is not to downplay the impact of rising house prices: it’s certainly the case that the price of property, particularly in London, has been rising at a faster rate than wages;[3] but additional realities are now in play that make acquiring a first mortgage a real possibility for many – as evidenced by the numbers referenced above.

The reasons for the rise are manifold. On the one hand, average mortgage rates at present are as low as they’ve been in years. Not only is this true for standard two-year fixed rate mortgages generally, which have fallen from 4.79% in 2009 to 2.49% today,[4] but also for high loan-to-value two-year fixed rate mortgages, i.e. those most commonly taken out by first-time buyers, which have dropped from 5.67% in September 2013 to 3.41% in February 2019.[5]

In addition to the rate decreases just referenced, the range of products currently available to small deposit borrowers has increased drastically in recent years too, with the number of 95% LTV products rising from just 3 in March of 2009 to 391 today.[6] One of the effects of this increase is the precipitous drop in rates just described; another is the upsurge in the number of prospective first-time buyers eligible for mortgage products. There are now even options open to first-time buyers who are unable to generate a 5% deposit, with lenders like Lloyds and Santander offering “100% LTV mortgages” provided applicants have a relative who is willing to place 10% of the property’s value in a savings account for the first three years of the term. Likewise, others who lack an income of sufficient size to acquire the mortgage they desire – this is particularly true of young people whose earning potential is large but who are presently on a starter salary – may now find themselves abounding in options: the Joint Borrower Sole Proprietor mortgage model, for example, effectively allows first-time buyers to “borrow” affordability capacity from a guarantor; and the newly introduced young professional mortgage model offers young professionals in specified industries the chance to borrow up to six times their income.

On top of all of this, in 2013 George Osbourne set up the Help-to-Buy programme, which is an initiative aimed at helping prospective buyers onto the property ladder by providing them with access to interest free loans of varying sizes depending on property location, as well as assistance in building a deposit using the Help-to-buy ISA. Between April 2013, when the programme was introduced, and December 2017, more than 150,000 properties were bought using the Help-to Buy scheme; 80% of these purchases were made by first-time buyers.

How setting aside a deposit of £17,500 could save you £1 million over 40 years

The first choice we meet with when negotiating the terrain of the property market is whether we rent or buy. The attractiveness of renting, therefore, is inversely related to the attractiveness of buying. When buying is attractive, renting is not; when renting is attractive, buying is not. In order to understand the recent rise in the number of first-time buyers, we need to consider the factors affecting the relative appeal of each of these options: foremost amongst these factors is cost – which of the two options will prove to be more of a financial burden. As will soon be demonstrated, buying is presently so far ahead of renting on this front as to render the decision a no-brainer: to so much as entertain the idea of long-term renting verges on lunacy.

We’ve taken two properties on the same road in Brent Cross with similar specifications – one currently up for sale, the other for rent – to illustrate this point numerically. The property up for sale is on the market for £350,000, meaning that in order for a prospective buyer to acquire a 95% LTV mortgage, they would need to generate a deposit of £17,500. This would leave them with a loan size of £332,500. Going by the market leading rate for this kind of mortgage over 40 years, we would expect the mortgage holder to pay something in the region of £1,160 per month. In contrast, the rental property we found goes for £1,129 per month.[7] The difference between these two numbers may seem slim at first glance, but once the full complexity of the situation is fleshed out, the preferability of the buying option becomes startlingly apparent.

First, in the case of the mortgage holder, around £600 of their monthly mortgage payment goes towards paying off the principle of their loan. Each payment is therefore tantamount to putting £600 pounds in a savings account each month. In the case of renting, however, every penny paid goes irretrievably to the landlord. In other words, 100% of the rent is a sunk cost compared with under 50% of the monthly mortgage payment.

Next, the amount of rent paid each year is expected to rise in line with inflation. Assuming, therefore, that the rate of inflation is 2.5% each year, rent on this property will have risen to £1,277 within five years, and to £2951.40 by the end of the 40-year term. In contrast, during the first five years of the mortgage term, the size of the monthly mortgage payments will remain constant at £1,160; and at the end of the mortgage’s fixed term, the policy holder will have an opportunity to remortgage and possibly take advantage of any gains in equity they’ve made by moving up to a higher LTV band, where, under ceteris paribus, they will pay a lower rate of interest. It is conceivable, therefore, that the size of the mortgage payments will decrease over time, while rent will almost certainly proceed to rise in line with inflation, possibly faster.[8]

*first year’s mortgage payments plus deposit

Taking these realities into account, we can calculate the cumulative cost of renting and buying over the 40-year term of the mortgage. Assuming that inflation will rise at 2.5% each year and that rent will increase in line with this figure, the total amount that will be spent on rent over 40 years will amount to £911,285.22. Assuming, on the other hand, that mortgage rates remain constant over the duration of the term,[9] the total cost of buying a property will amount to £574,300. The difference, therefore, between renting and buying over 40 years is £336,985.22. This is a colossal difference that does not even account for the fact that the individual opting to buy will own their property outright. If, on top of the calculations already made, we assume that property prices continue to grow at their 40-year trend rate of around 1.7%, this individual will own a property worth somewhere in the region of £675,000 in forty years’ time. This completely offsets the money spent paying interest on the loan and leaves our hypothetical buyer with a hypothetical profit of around £100,000 (£675,000-574,300).

As will be evident by now, there are a number of assumptions upon which these numbers rest; these assumptions are dependent upon a number of factors that are impossible to predict with any degree of precision. They are, however, the best guesses available – the most probable given current and past trends – and they leave us with an unavoidable conclusion: buying is the superior option of the two by several orders of magnitude. High LTV rates are extremely competitive; rents are astronomical and look set to rise further. Though the following may sound unforgivably hyperbolic, it is not: putting together a deposit of £17,500 in order to acquire a mortgage could save you £1 million over the next forty years.

Tightening your belt now, scraping together your savings, recruiting your parent’s support, and doing anything else you can in order to put together a deposit is the most sensible financial decision you can make as a would-be first-time buyer. There are initiatives in place to help you in this endeavour; there are mortgage products available that may be able to accommodate your unique circumstances. If you are interested in exploring these options further, there’s no better place to start than Private Finance.


[1] https://www.ukfinance.org.uk/press/press-releases/number-first-time-buyers-reaches-12-year-high-2018

[2] https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/families/bulletins/familiesandhouseholds/2017#how-does-the-number-of-people-who-live-alone-vary-by-age-and-sex

[3] Average property price 7.8x Average income in 2017 https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2017

[4] Moneyfacts – https://www.financialreporter.co.uk/mortgages/mortgage-rates-halve-since-financial-crisis-moneyfacts.html

[5] Moneyfacts – https://moneyfacts.co.uk/news/mortgages/average-fixed-95-ltv-rates-lowest-on-record/

[6] Moneyfacts – https://moneyfacts.co.uk/news/mortgages/mortgage-rates-halve-since-financial-crisis/

[7] The two properties can be found at the following web addresses: https://www.rightmove.co.uk


[8] Last year, rent rose by 3.8% – significantly more than inflation

[9] An assumption that seems reasonable to make: average interest rates will probably rise at some point over the 40 year term of the mortgage, but this is likely to be offset by access to progressively lower LTV band deals throughout the term.

Your home may be repossessed if you do not keep up with monthly payments of your mortgage.

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