Help! I’m a first time buyer

Property listing circled in a newspaper by the first time buyer

Investing

Alistair Hardie

26th May 2014 at 1:41pm

How much do you spend on haircuts in a year?

You might be surprised to know that question could be relevant if you’re planning to get a mortgage!  New lending rules introduced in April mean mortgage providers now have to ask more questions than before, to assess whether you can afford to take on mortgage payments.

But before you get to the stage of arranging a mortgage, you normally need to have saved-up for a deposit. And there’s other costs to keep in mind too, like stamp duty and legal fees.

I was speaking to a colleague recently about what motivated her to get on the housing ladder and how she planned her finances for that. Her story below is a good case study of why saving smart can help you (or your loved ones) as a first time buyer.

Making a move – in her own words

I clearly remember my dad telling me ‘now would be a good time for you to buy a house.’

I hadn’t really given it much thought. before you get to the stage of arranging a mortgage, you normally need to have saved-up for a deposit. And there’s other costs to keep in mind too, like stamp duty and legal fees.I was 21, working in London and renting a one bedroom flat with a friend. I was on a salary of around £20,000 and had no savings to speak of. But maybe dad had a point. Having my own place would be ‘cool’. And so I decided to start looking.

It didn’t take long to find a small terraced house in my home county of Kent, an easy commute to London. I saved £2,500 deposit in a few months (5% of the value), got a mortgage for 2 ½ times my salary and, hey presto, up went the sold sign.

Fast forward 20 years and how times have changed.

House prices have significantly outpaced earnings

House prices have more than trebled over the past 20 years, while average wages have not even doubled.* So what does this mean for today’s first time buyers?

The average house price among first time buyers is £189,000** and figures from the Council of Mortgage Lenders show their average income is just over £35,000.***

In the absence of any serious savings, these figures mean first time buyers would need to borrow over 5 times their salary to buy their first home, which just isn’t affordable. Even if it was, banks will not lend this amount – tending to cap mortgage borrowing at around 4 times income****.

The bank of mum and dad

As a result, more than half of all first time buyers need help to raise a deposit – which according to the Council of Mortgage Lenders is typically 20% of the property’s value. That’s an eye-watering £38,000.  A far cry from the £2,500 I had to find to buy my first house.

But what if your family can’t help you out to this extent? more than half of all first time buyers need help to raise a deposit – which according to the Council of Mortgage Lenders is typically 20% of the property’s value.Not many parents or grandparents have this amount of money to spare. The Government recognises this and last year launched the Help to Buy scheme. It is designed to help those trying to get on the housing ladder who can afford mortgage repayments but are struggling to raise a deposit.

Start saving now

While I got lucky when I bought my first house, what will happen when my children reach this stage?   Will I be able to help them out to the tune of £40,000 each? One thing is for sure, if I want to get anywhere near this amount I need to start saving now.

And so I have opened an ISA in my name which I’m using to save for the boys. I decided against a Junior ISA as I would prefer not to hand the money over to them when they turn 18 and I like the idea of being able to access my savings if I need to.

I have opted for a Stocks and Shares ISA given I’m saving for the long term. While investing in the stock market has its risks – as my money could go up or down in value – I need my money to work hard for me and ideally keep up with any growth in property prices.

Feeling confident

We’ve plenty of milestones to go before the boys are collecting the keys to their first house – we’ve school and university first. But I hope one day to be telling them – just as my dad told me – that now is a good time to buy a house and feeling confident that I can help them do it.

The information in this blog and any responses to comments should not be regarded as financial advice. A Stocks and Shares ISA is an investment. Its value can go up or down and may be worth less than you paid in. 

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 * Based on data from housing charity Shelter

**House Price Index, December 2013

*** Based on figures from the Council of Mortgage Lenders

**** See the following article from the Telegraph for more information