Return of the 20% deposit?
Date online: 30/09/2014
The scheduled end of the Government’s Help to Buy mortgage guarantee scheme (HTB2) by 2017 – and the likely return to average 20% deposits for first time buyer house purchases – means aspiring homeowners could see the time needed to save for a deposit increase by more than 7 years, according to research by Genworth, a leading mortgage insurer.
First time buyers need as little as a 5% deposit to qualify for a mortgage under Help to Buy 2, which is currently scheduled to end by Q1 2017. The Bank of England’s house price forecast1 indicates the average first time buyer property will reach £173,308 by this point2, meaning a 5% deposit would amount to £8,665.
Genworth’s research among aspiring FTBs shows those who can afford to save for a deposit can put aside £246 on average each month.3 With 3% annual interest, someone who started saving today would need 2 years and 10 months to reach £8,655 and would hit this target by July 2017. They could do so by Q1 2017 by saving just £33 extra each month.
But an end to HTB2 and a return to a norm of 20% deposits – as seen in 2011-134 – would mean them needing to save £34,662 in Q1 2017. With monthly savings of £246 gaining 3% annual interest, it would take a wannabe buyer more than 7 years longer (10 years and 2 months in total) to do so.
Anyone starting to save today would not hit this Q1 2017 target until November 2024 – by which time an extra 7¾ years of house price growth would be likely to mean they are still left stranded.
The same Bank of England forecast of 20% house price growth over three years also means aspiring first time buyers could face prices which are rising far faster than they can save.
Reaching £173,308 by Q1 2017 would mean the average first time buyer property price gaining £28,876 since the beginning of this year. This is 3.12 times the £9,249 a typical first time buyer can save up over a three year period and the equivalent of house prices gaining £3.12 for every £1 saved towards a deposit.
Help to Buy 2 has therefore given aspiring first time buyers a lifeline by boosting access to loans with deposits starting from 5% – making it far more achievable to buy despite the forecast rise in house prices.
Simon Crone, vice president for mortgage insurance – Europe at Genworth, commented:
“Trying to buy your first home in the current climate is like chasing a runaway train. Even with good salaries that could comfortably support a mortgage, thousands of aspiring first time buyers can only save modest sums – especially those who are already paying rent. This deposit trap is why many feel they are left with the all-or-nothing choice of borrowing from family or waving goodbye to ever owning a home.
Help to Buy has significantly improved access to mortgages with deposits that are actually realistic to save. The numbers using the scheme may be modest, but it has made significant inroads in the short-term to boost access at the lower end of the property market.
The danger is that its limited lifespan leaves the hopes of many aspiring homeowners hanging in the balance. There is room to iron out flaws in the scheme – for example, by lowering the £600,000 upper limit. But we need an exit strategy and longer term plan that does not pull the plug out from first time buyer lending in 2017.”
Market yet to recover from drought of traditional first time buyer loans
First time buyer mortgages of 90% loan to value (LTV) or above were the norm for 25 years until the recession, when a lending drought reduced the average to 75% LTV – severely limiting people’s ability to buy their first homes.
A slight recovery from 2011 to 2013 saw 80% LTV loans become the norm: still leaving first time buyers to finance a larger share of their purchase than any point in the previous 40 years.
Even with Help to Buy 2 encouraging more loans with a 5% deposit, this year’s average first time buyer loan (to June) is still 83% LTV, with borrowers contributing 17% of funds themselves.
It suggests the market is still dominated by a minority who are cash-rich or have financial support from family. Genworth’s research shows that less than one in five (18%) aspiring first time buyers can call on family support, while one in three (33%) have given up hope of ever raising a deposit.
Simon Crone, Vice President for Mortgage Insurance – Europe at Genworth, commented:
“Rising house prices and another mortgage drought would deal a double blow to first time buyers and set their prospects of owning a home back by years. It is time to consider how an improved scheme to support high LTV activity can make affordable mortgages a long-term offer to first time buyers while transferring risk from the taxpayer to the private sector.
By implementing a coherent strategy well ahead of the end of Help to Buy, private mortgage insurers’ ability and appetite to take on this challenge can be confirmed. It would also allow the scheme to transition to the private sector gradually and smoothly during its current lifetime, with the private sector replacing the government by the scheme’s end. Failure to address this ahead of time could further damage home owning ambitions and cause disruption to the wider market.”