The Cost Of Buying Your Dream Starter Home
From mortgage income multiples to deposits and LTVs, explore the challenges and options for first time buyers in today’s property market.
The average cost of a home in the UK currently stands at £235,298 according to the Office for National Statistics, up 2.2% in the last twelve months. However, there are strong regional variations, with the average being much higher in the capital than in the north of England. For example, the average cost of a property in London stands at £453,385 in comparison to the sale price of a typical Liverpool home which would be £122,700. The overriding question that first time buyers are asking, regardless of where they’re based, is ‘how much money do I need to get on the property ladder?’.
Mortgage Income Multiples
Unless you’re a cash buyer, then most first-time buyers will need to rely on taking out a mortgage in order to fund the purchase of their starter home. Lenders use a multiple of your annual salary to determine how much they’re happy to let you borrow. They have maximum lending brackets in place to ensure that you’ll be able to afford the cost of monthly repayments, and will factor in the possibility of a rise in interest rates in the future. Typically, lenders will offer between 4x and 5x the amount of your current annual salary. So if you earn an annual wage of £35,000 then you could expect to find a lender willing to lend you £140,000 to £175,000. Your lender will take various other factors into account such as your credit history and if you’re applying for a joint mortgage rather than making a single application, then you’ll usually be able to borrow more as a couple. Nevertheless, depending on where you’re buying, it’s common for property prices to be way ahead of your current earning capability, which is where your deposit will come in.
Deposit Percentages
Many high street lenders have relaxed their deposit requirements somewhat following the 2008 economic crisis. However, saving for a house deposit is arguably the largest challenge for first-time buyers. Begin by working out an approximate price of property you might be able to afford and then coming up with a strategy to save a deposit for it, which may of course include accepting financial help from family members. Lenders are commonly offering mortgage products with a loan to value ratio of 90% or even 95% in some cases. This means that first time buyers will need to stump up 5-10% of the property price as a deposit lump sum. A local firm of Brentwood estate agents explains that there may be further restrictions on new builds, where your typical range of mortgages will allow you to borrow up to 85% of the property value. Often, the higher the LTV, the higher the interest rate and therefore the cost of the monthly repayments, so where possible it makes sense to save as much of a deposit as you can.
If this still seems impossible as a first-time buyer, there are incentives available such as shared ownership, Help to Buy and even family mortgage products which can make it easier for you to achieve your dream of getting on the property ladder in 2020!