Mortgage deposits for first time buyers dropped below 20% for the first time in more than three years, according to new figures.
Reports from the Council of Mortgage Lenders (CML) show that the average first time buyer deposit shrunk to 19% in July. This is the lowest level since November 2008 – injecting minor levels of excitement into the stagnant housing market.
Whilst this is great news for homebuyers, as deposits could fall further in the next 12 months, struggling first time buyers might not want to start celebrating just yet. Tight lending restrictions combined with low-income levels make it harder for potential buyers to raise the capital needed, even if average deposits have taken a marginal dip.
CML figures show that the average loan–to-value (LTV) ratio for first time buyers increased from 80% to 81% in July. This means that the average mortgage deposit is now 19%, a figure which has not been seen for several years.
Since the global economic meltdown, banks and lenders are not willing to part with their cash as readily as they would have pre-crisis. This has only added to potential buyers’ financial woes, as they struggle to raise the funds needed for a high deposit.
Before the recession, buyers could obtain a mortgage with deposit of 10% or even 5% and now the average stands at 20%. As the cost of living has dramatically increased and real income levels have seen a sharp drop, many have been unable to save for such large deposits. As millions have been forced into the private rental sector for longer whilst they try to raise deposits, the cost of renting has soared.
Rents reached a record high in England and Wales last month with tenants paying an average of £725 a month. According to LSL letting group, the previous record high was in October of last year when rents hit £720 a month.
An unhealthy combination of high deposits with high rental prices has had a significant impact on first time buyer savings.
Mortgage lending to all buyers increased in July, which is in keeping with the rise seen throughout the year. However, the number of mortgages arranged by lenders for first time buyers increased by 5% from June to 49,500. This is also a 5% increase on last year’s figures.
The number of loans taken out by home movers increased by 8% compared to June and 4% compared to July last year. Home movers were advanced 30,500 loans worth a staggering £5.1 billion.
Following a drop in lending after the end of the stamp duty holiday in March, mortgage-lending levels have steadily increased. A total of 49,500 loans worth £7.6 billion were advanced in July marking a 5% rise on both the same period last year and the previous month.
Despite this minor improvement and positive shift in the market, it is still a far cry from pre-recession levels. The current level of borrowing is only half that seen before the banking crisis started in 2007 and it’s unlikely that it will return to those levels in the near future, if at all.
First time buyer lending remained ‘resilient’, however, this area failed to match the growth in home mover lending. Only 19,000 loans were advanced to first time buyers, which actually marked a fall on the total 19,200 lent in June. This was, however, stronger than last year’s figures.
The value of the loans increased against June’s figures for first time buyers at a total of £2.5 billion, yet the number of loans advanced fell. According to the CML, this reflects that fact that an increasing number of first time buyers are purchasing more expensive properties. In July, 14% of would-be home buyers snapped up properties worth over £250,000 compared to 12% in June.
This meant that this group forked out 3% in stamp duty, compared to the figure of 1% for properties over £125,000 and up to £250,000. A number of buyers are unable to afford deposits for a property as the cost of living and high inflation has eaten away at disposable incomes. Yet this illustrates that those who are able to save are aiming to buy more expensive properties.
As mortgage deposits slightly eased in July to 19% rather than the average 20% requirement, could first time buyers potentially have more cash?
CML director general Paul Smee said: “July’s figures show a gradual improvement in the market with lending approaching the sort of levels we saw at the end of the stamp duty concession.
“While overall market conditions remain tight, new initiatives such as Funding for Lending and NewBuy have the potential to help lending to continue to ease gradually.”