Purchasing a home using a 95% loan to value (LTV) mortgage may be one of the quickest routes to homeownership but buyers are sacrificing disposable income for the privilege, according to new research published today by leading residential estate agent, Hamptons International.
The latest Ability to Buy Research shows that an average couple, working full-time, can start their housing journey three years sooner, and a single buyer eight years sooner, by taking out a larger loan, but higher mortgage payments mean they will have £2,300 a year less to spend on themselves as a result.
Hamptons International’s Ability to Buy research is the only affordability analysis which takes into account the pressures buyers face in the cost of living as well as changes in interest payments and house prices. It includes both the time it takes to save for a deposit and the affordability of mortgage payments.
Q1 2016 findings:
An average couple, working full-time, is able to save for a deposit on a 95% LTV mortgage in two years and a single first-time buyer in six. This cuts more than three years and almost eight years, respectively, off the time needed to save a deposit for an 85% LTV mortgage. (see tables 1 and 2)
But the additional borrowing on a 95% LTV mortgage means a couple would have 10% (£2,300) less each year to spend on other things than if they chose an 85% LTV mortgage. For the average single buyer this sum represents a 36% cut in available income, which will be impossible for many to afford. (see tables 3 and 4)
In London, the smaller deposit requirement on a 95% compared with an 85% LTV mortgage cuts the time to save by almost 34 years for a single first-time buyer and by seven years for a working couple. But the additional mortgage costs would leave them with £6,400 a year less to spend on themselves. (see tables 1, 2 and 3
Overall ability to buy improved in Q1 2016 compared with Q1 2015. On the saving a deposit side of the equation, a single first-time buyer is able to shave three months off their saving time for a 15% (85% LTV) deposit, bringing it to 13 years and nine months. An average first-time buyer couple working full-time can save up a 15% deposit (85% LTV) faster - in five years and three months, but this is unchanged from last year
On the mortgage affordability side of the equation, lower mortgage rates, higher wages, as well as continuing low inflation, means that buyers are better off than in Q1 2015. On average, after mortgage payments on an 85% loan, an average couple working full-time is now £66 a month better off than last year while a single first-time buyer is £25 a month better off.
The expensive areas of the South, particularly London, remain the exception. Higher house price growth in the capital continues to put buying out of reach. The average couple buying with a mortgage is £25 a month worse off and single first-time buyers would be £92 worse off compared to Q1 2015. Saving a 15% deposit (85% LTV) takes three months longer for a couple and almost three years longer for single buyers than it did in Q1 2015.
Fionnuala Earley, Director of Residential Research at Hamptons International said:
“The Help to Buy Mortgage Guarantee scheme, which was introduced on 1 April 2013, opened the door for banks to sell more high LTV mortgages, a trend which has continued, even outside of the scheme. This has been a blessing for many buyers who have been unable to buy a home due to the high deposit barrier.
Many will see the smaller deposit requirement as the quickest route to homeownership, and rightly so, as an average first-time buyer couple can save a deposit in just two years. However, there is no such thing as a free lunch and the trade-off is in paying for the finance.
Choosing the low deposit route means higher mortgage payments, which cuts into disposable income. Borrowing more also costs more over the life of the loan. For an average priced first-time buyer home in England and Wales, costing around £162,000, reducing the deposit from 15% to 5% (85% LTV to 95% LTV) adds an extra £190 to the monthly mortgage bill which adds up to an additional £57,000 over the term of the mortgage.
There is certainly a trade-off that buyers need to think carefully about – especially in the face of changing house prices. Is the short-term time gain worth the longer term financing cost?”
For further information please contact:
Press Office, Hamptons International
Tel: 07590 183058
Press Office Hamptons International
Tel: 07769 677825
Residential Research Director, Hamptons International
Tel: 07760 163 120
About Hamptons International
Hamptons International is a leading residential estate agent and property services organisation, operating in London and the South of the UK. With more than 140 years of experience in the property market and a commitment to industry innovation and exceptional levels of customer service, Hamptons International today offers a wealth of award-winning services including UK and international Sales, Lettings, Property Management, Corporate Services, Residential Development, Development Land, Valuation and Property Finance.
With headquarters in London’s Fitzrovia, Hamptons International has an international network of more than 87 offices and is a subsidiary of Countrywide, the UK’s largest estate agency and property services group.