Market Insight - July 2016
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Striking a Balance

The First-Time Buyer Dilemma
Is buying a home sooner worth the higher mortgage costs?

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The deposit barrier has long been a key factor in preventing many from buying their first home. A typical first-time buyer deposit required for an 85 per cent loan to value (LTV) mortgage in England and Wales is now £24,280, almost 20 per cent higher than the average annual post-tax income of a young full-time worker. In London, this rises to £67,830, over 160 per cent more than the average post-tax income of a young full-time worker in London.

However, the increasing availability of higher LTV mortgages, thanks in part to the government’s introduction of the Help to Buy Mortgage Guarantee scheme in 2013, has meant many buyers are now able to buy their first home with just a 5 per cent deposit.

An average couple, working full-time, can save a deposit on a 95 per cent LTV mortgage, in two years and a single buyer in six years. This is more than three years and almost eight years faster, respectively, than they could have saving for a more typical 85 per cent LTV mortgage.

It comes as no surprise why many will see the smaller deposit as the quickest route to home ownership. However, there is no such thing as a free lunch and the trade-off is in paying for the finance. A lower initial deposit would mean that buyers face higher monthly mortgage payments which would eat into their disposable income.

The additional borrowing on a 95 per cent LTV mortgage would cost £2,300 more a year to service. For an average couple this means that they would have 10 per cent less each year to spend onother things. For a single buyer, this represents a 36 per cent cut in their available income.

Housing affordability issues are most severe in the capital and choosing the low deposit route to buy a home faster is a very attractive remedy for those struggling to meet the upfront cost for homeownership.

The reduction in the length of time required to save a smaller deposit is certainly striking; the smaller deposit means that a couple can buy a home in just over 4 years and a single buyer in just under 12 years; that’s 7 and 46 years quicker than they would if saving for an 85 per cent LTV loan. However, the additional mortgage costs would leave buyers with £6,400 a year less to spend on themselves – this is simply impossible for many to afford.

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