Let’s state the obvious for a moment: it’s really hard to buy a home in the UK as a first-time buyer. There’s no ifs or buts about it, unless you’re loaded or have the ‘bank of mum and dad’ to lean on, you’re not going to find a quick, easy, or cheap way to get on the housing ladder by any traditional means.
At Keyzy we love to help families, key workers and first time buyers transition from renting to owning. So we thought we’d write this article as the first part of a series talking through this transition and what you should know before starting the journey. One thing to be clear on from the outset is that this is not mortgage advice, it’s a complaint about the way things are!
Before we jump into the reasons why buying a home is so hard, let’s quickly look at the path typically used for the vast majority of first-time buyers to get on the housing ladder – the mortgage.
Some etymology to start. The original word is from Latin and is made up of two parts mort meaning ‘death’ and gage meaning ‘grip’. It literally means ‘death-grip’! It’s a life-long (in many cases) loan that grips your finances for your working life so you can pay for the home you live in and one day own it outright.
So, how does a mortgage work?
- Your home has a value, for argument’s sake say £100,000. You have a deposit of 10% (£10,000). You therefore need a loan of £90,000 to buy the home.
- Your loan to value (LTV) is 90%. Generally speaking, the lower the LTV the lower cheaper your interest rate. This is because the bank sees a lower percentage LTV as a lower risk for them. Lenders have to borrow money from the financial markets and get a better price themselves for a lower LTV loan and can pass some of that saving onto you.
- In most cases you will have a repayment mortgage and want to repay the loan over time, say 30 years. So, the lender charges you on a monthly basis for the interest on the loan and the repayment amount.
- There’s also a ‘product term’ which will dictate a much shorter period where you lock in some sort of fixed interest rate that expires after 2-10 years depending on what you choose.
- Finally, over time your deposit (now turned into equity/ownership %) grows as you repay the loan. If the value of the home goes up £1,000 your equity increases and the opposite happens if the value goes down, but the loan is not affected by value changes in the home.
There’s a lot more to it, of course, but these are the basics. Get a deposit, get a loan, pay it off very slowly once you move in, own it 100% outright at the end of your working life and hope it’s worth more next year than the previous year.
Easy right? Not so fast. Here are six reasons why the dream does not easily become a reality.
1. The nest egg problem
Let’s start with some simple facts. The average house price in the UK is around £265,000 at the time of writing this. Most mortgages for first time buyers require at least a 5 or 10% deposit. Quick calculation… to buy the average home you need a savings balance of between £13,250 and £26,500. Ouch. But we’re not finished yet, a solicitor will set you back a pretty sum, plus surveys, stamp duty and moving costs. This is before we even get started with renovation and remedial work that you might want to do on day one of owning. So let’s call it a nice even £20,000 to £40,000. Double ouch!
Is it normal for the average first time buyer to have this kind of cash on hand? One more stat for you: according to Upthegains website, the average under 35-year-old has about £3,000 saved up. Let’s give our 35-year-old the benefit of the doubt and put her in a relationship with someone who also has a healthy £3,000 saved up giving them a solid £6,000 deposit. We need to hold some money back for those extra costs so call it £2,000 in total. In the best-case scenario with a 5% deposit that’s a home worth around £40,000. Or in this case a small garage in Basingstoke. Even if we pretend there is no extra costs other than the deposit then that only gets us to £120,000 with our £6,000. Now we’re talking a 2-bed terraced house in the Middlesborough. Not bad, but we’re a long way from solving the problem countrywide.
Yes there are some 100% mortgages out there which don’t require a deposit, but as we wrote in a previous article here, this is not widely available and unlikely to help the vast majority of homebuyers. So, for most of us we fall at the first hurdle, unless of course we have help. The infamous ‘bank of mum and dad’ or the unfortunate alternative of inheritance. It’s great if this is your situation and you have some wealth in the family and willing family members to back you up, but it’s not the norm for most.
2. The income amplifier
Imagine you’ve saved enough money for a healthy deposit and moving costs and are ready to look at your mortgage options. How does the lender decide how much to offer to you? Fill in a short form with your household income and your fixed spending (e.g., childcare, car loan etc) and they’ll spit out a number that could be up to 4.5 times your income. Some can go higher up to 6 times your income but only in rare cases for a very limited number and type of customer. 45% of mortgages this year were for over 4x salary for individual and slightly less for those in couples according to the FCA. We’ll use 4x as our average here.
So let’s imagine your income is around the UK average of £30,000, and we’ll put you with a partner giving you the average household income of £38,000. At 4 times that’s about £152,000. Wait! That’s a 3-bed house in the Midlands isn’t it? But we’ve forgotten, we still need that deposit, you might not be in a relationship, your income could be less, and you could live in the South-East! That deposit will also help us stretch further on the home value, let’s say £15,000 plus moving costs. We land at a £167,000 budget…if you’re average.
3. The price tag
Are any of us average? Up to this point in the article we’ve made a lot of assumptions about your circumstances being bang on the average. But that’s not how the world works. The US Airforce once did a study on 4,000 pilots and 140 of their physical dimensions to calculate ‘the average pilot’ then they sifted through the 4,000 pilots to see if any one of them was the average. Not even one of them was, and very few were average on any one of the 140 measurements. You could have the average savings/income, or more or less, be single or in a relationship, live North or South and so on.
When it comes to the relationship between income and affordability of homes in the UK it’s almost never the case you’ll be looking for a £270,000 home with an income roughly one quarter of that value. Let’s look at the data.
The average home in the UK is actually around seven times the average household income. In some parts of the UK, it’s up to twice that ratio! Hopeless. What do you do as a key worker living in a major city where house prices tend to be exaggerated?
Paired with this, we have a supply and demand problem in the UK. A core principle of economics is that if supply of a product outstrips demand, then prices will be low and vice versa. If everyone wants to get their hands on the latest pair of trainers and they’re a limited edition, prices go up. So it is with housing in the UK where so many of us want to buy a home but there simply aren’t enough of them and not enough new ones being built to meet the demand.
Yes, house prices are trending downwards in most regions in the UK, but even the most pessimistic estimates don’t predict them to fall below pre-COVID levels which were at the time still eyewateringly high. And then everyone agrees, they will start to go up again come 2025.
A lot of would-be buyers who missed out over the past 20 years had been hoping for a price crash. They tried to save up for their deposit, but house price increases rose much faster than they could save causing them to lose out on price gains and get left behind in rental hell.
4. The real cost
We haven’t even got to the cost of living crisis yet when it comes to homebuying. But let me summarise it for you here. The average mortgage interest rate is currently around 6% and the average mortgage monthly payment accounts for 35% of the average mortgage holder’s income (49% in London). And this number is growing as more people roll off their low interest rate fixed products and search for rates which will almost certainly be a lot more than what they have today.
Add to this the rising costs and other pressures on households such as energy, food, childcare, clothing, and just about everything really. As a prospective homebuyer, do you want to or are you able to sacrifice this level of your monthly income for the right to own a home? Even if the bank approves you for the mortgage, do you feel you are able to keep up the payments and what effect will it have on your life? Some people may need to give up other important pursuits to gain this step in life, not to mention the potential impact on mental health that financial strain can cause.
Low deposit amounts + high interest rates + outrageous house prices + inflation = very high monthly mortgage costs. I did say at the beginning that buying a home is hard.
5. Jumping through hoops
Some of you could be reading this thinking ‘I have a good income and a deposit and property prices aren’t so bad in my area, but I’m still struggling to get approved for a mortgage.’ Having your financial house in order, at least form a lender’s perspective can mean much more than just your income and available savings. Many lenders will pick apart your wider circumstances and refuse your mortgage, even if the monthly payment would be the same or less than what you’ve been paying in rent for years. Let’s look at some of the reasons why.
Each lender has their own set of criteria they want you to meet before they give you a mortgage. This is because they have to asses the ‘riskiness’ of each loan they write to make sure they remain financial sound and profitable. Things like your employment status or industry, credit score and even age can impact their decision. Sometimes if you fall short on just one of these criteria it could be enough for them to say no. Here’s a list of some of the things lenders often care about (varies between lenders and not exhaustive):
- What type of employment contract you have. Full-time permanent is better than part time or contract based.
- What industry you work in. ‘Safe’ jobs like teaching or healthcare are seen as the least likely to be lost.
- Whether you’re self-employed or employed by a company. The self-employed often have to provide more evidence of stable in come, like two years of bank statements.
- How long you’ve been in your current job. The longer the better of course.
We’ve all heard of the credit score. These are provided by three main credit reference agencies and can be a guide to a potential lender on your creditworthiness. For example, one major provider gives you a score out of 999. A score of 999 would make you ‘excellent’ and give them every reason to give you a loan. But a score of 300 would make you ‘poor’ and far less likely to pass. So what makes up these scores? Well, it depends on the provider and they don’t exactly publish how their scoring works, but generally speaking here's what’s makes your score worse in no particular order:
- Having high amounts of unsecured debt (i.e., credit cards, car loans)
- Recent applications for credit (including things like BNPL)
- County court rulings against you, including financial related items
- Not being on the electoral role
- Recently moved home
- The average age of your bank accounts is low, or you frequently switch providers
- You’ve missed payments on your loans or contractual agreements like mobile phones
- You don’t pay off your credit card or overdraft in full each month
- You use a high proportion of your revolving credit each month (overdraft, credit card)
Some of us might not even be aware of our credit score, and it can be baffling if it is low sometimes because we live normal lives: shopping around for a good deal on a bank account, move to a new flat to save money or be near a job, get a new job, forget to register on the electoral role and so on. All these very normal things that have nothing to do with our ability to pay a mortgage can cause us to get a low score and be refused one. Now that’s not fair.
There can be a whole raft of things a lender could ask for before giving the nod for a loan and some of these things may seem generic, unfair, and not really taking into account your individual circumstances. The dreaded phrase ‘I’m sorry our policy is clear…’ is a tough one to hear. Well, not so clear to many first-time buyers I’m afraid.
6. Real alternatives
We’ve talked a lot about the standard mortgage in this post, but homebuying alternatives are frequently talked about in the media and the government alike. Help to Buy, Shared Ownership, Mortgage Guarantees, Equity loans, Lifetime ISAs, affordable housing. Each of these has aimed to solve one or two of the challenges we’ve mentioned above and there are some success stories. But no silver bullet. With a problem of this scale we need more of everything: more new homes, lower prices, better savings rates, more relaxed rules from lenders, more support from government, and critically more innovation and creativity from incumbents and new companies alike to help people onto the property ladder.
At Keyzy we’ve set out to try and provide a new kind of alternative to the traditional path to homeownership. Shameless plug we know, but it’s important to point out that there are alternatives you might not be aware of that could make a difference to your life. Here’s how we help tackle the challenges of buying a home:
- We don’t require a deposit and the only fees you must pay are a one-off product fee of £1,999 and a survey and valuation fee of £999. So, with a 35-year-old’s average savings of £3,000 you’re good to go with £2 to spare! And that’s without a partner.
- We’re not restricted in the same way a mortgage lender would be on multiples of your income. We carefully review your individual financial circumstances, look at your monthly income and outgoings and make sure the Keyzy costs are something you can afford and derive your home buying budget from there.
- We lock-in the price of your home the day you move in. You rent it from Keyzy for a few years and buy it back at the price we paid for it (including our costs) at the end of the lease. No more getting left behind by price increase. If the home goes up in value while you’re living there you get to keep the gains. Not only that, some of your rent can be used towards reducing your buy back price so the amount you have to pay actually goes down over time.
- The monthly costs with Keyzy are fixed, no increases. We don’t jam up your rent every year and as we’ve said above, some of your rent you get back at the end of your lease in the form of a discount.
- We have a flexible, secure, and empathetic application process. We truly look at your individual circumstances and don’t have super-strict requirements like a lot of banks. We still must make sure you are able to make your payments each month so we have to keep an eye on any financial problems you might have. But instead of ‘computer says no’ we make the computers do the work for us and look at your bank statements in fine detail to try and make things work. We also report your monthly payments to credit reference agencies, helping you build up your credit score in time for the end of your contract.
- At Keyzy, we want to be a true alternative to people who are finding getting a mortgage tough. We will work with you during your multi-year lease with us to help get you into a place where getting a mortgage to buy the home from us will be easy. We’re here to help, and we exist to get you onto the property ladder sooner than you might have thought possible.
Disclaimer: The information provided in this blog is for informational and educational purposes only and should not be considered as financial advice. The content presented here is not a substitute for professional financial advice tailored to your specific circumstances. We recommend consulting with a qualified financial advisor or seeking guidance from relevant authorities for any financial decisions you may be considering. The author and publisher of this blog are not responsible for any actions taken as a result of reading this content.
Trying to buy a home can be a stressful and confusing time. Where do you start?