Can A First Time Buyer Get On The Market?

 

In the UK we seem to be intent on owning our own homes, and whilst I completely understand the sentiment, there is a growing trend toward the rental market. So why is this?

Probably the biggest factor for a First Time Buyer (FTB) is the affordability of buying even the smallest place. With the deposit, legal fees, searches and surveys there is a large bill awaiting anyone that plans on getting on the property ladder. Of course there are a vast array of deals around, some of them very tempting. The Halifax for example, are offering one with a 3% deposit, a payment term of 40 years and an income calculation of up to 5 times. Naturally there are varying criteria that anyone would have to meet should they apply, but in essence a FTB lucky enough to be earning 20,000 with no monthly debts to service, could borrow up to £100,000 with a 3% deposit. On top of that there is no arrangement fee, they offer a cash back of £250 and a refund of the survey fees. So what are the downsides??

Well I have to admit that I have no love of the HBOS group (or more specifically The Bank of Scotland) but this really does appear to be a good deal. The rate on their variable product is 0.74% above bank base, which at the time of writing means that the person will be on a rate of 6.49%. The company is in business to make money though, and they will tie the FTB in for 2 years (at this time).

I used the Halifax mortgage calculator to get the monthly payments based on an individual earning £20,000 and buying a property, say a flat, for £80,000 with a £5,000 deposit and wanting to pay the mortgage over 40 years.

For an interest only mortgage the monthly payment would be £403.51
For a repayment mortgage the monthly payment would be £436.28

For those who do not know the difference, if you take the interest only option you would never own the property, even after the 40 years, so unless you really can’t afford to, always take the repayment option on your own home.

The FTB has to take into account that on top of these payments they would also need to pay the council tax, utilities and maintenance for the property. Lets assume that this would come to £110 per month, so now we have outgoings of around £546 and hopefully there will be no big emergencies such as needing a new boiler or similar.

Add in some insurance for the property at £20, bringing us to £556.

Hopefully our buyer will get some help with the furnishing of the place but otherwise that would also need to be added to the initial costs too.

Our lucky FTB is earning £20k a year and that means their take home pay is likely to be around £1260 per month. They therefore have about £700 left to pay for everything else, including their food, clothes, transport costs, luxuries, socialising and saving for an annual holiday if they want one. Working on an average of 4.3 weeks per month this equates to £163 per week, which quite frankly is not a lot, especially for a young person that likes to socialise, or may have expensive hobbies. What is also not included into account is the all-important planning for the future in the shape of a pension or similar.

Something to be wary of is that this mortgage is similar to many others in that after a fixed ‘honeymoon’ period the interest rate reverts back to their standard variable rate, which at this time is 7.75%. This means that monthly payments would now rise to £504.31 for a repayment mortgage and our total increases to £624.

Now it is quite possible that we may soon see interest rates drop, but if they rise the FTB will have to add nearly another £56 to their monthly outgoings for every 1% increase both during and after the honeymoon period.

Despite this very attractive product from the Halifax, things are still looking extremely tough for the FTB and I wish anyone getting on the ladder, the best of luck!