First-time buyers now taking out longer mortgages
Seven in ten first-time buyers took out mortgages beyond the traditional term of 25 years last year - compared with just under half ten years ago according to a report looking into housing affordability.
Around 70 per cent of firsttime buyers took out a mortgage with an initial term of more than 25 years in 2020, up from 45 per cent in 2010, the research from Nationwide Building Society found.
This can add significant costs on to a mortgage over the longer term.
Nationwide calculates that increasing a mortgage term from 25 years to 35 years can increase the total amount of interest paid on a typical mortgage by 40 per cent.
Higher house prices relative to earnings continue to make raising a deposit a significant barrier for first-time buyers, the building society said.
It said that, across the UK, a 20 per cent home deposit now typically equates to 104 per cent of the pre-tax income of a typical full-time employee, up from 87 per cent ten years ago. However, low mortgage rates have kept monthly payments relatively affordable.
Andrewharvey,senioreconomist at Nationwide, said: “In 2018-19, around 40 per cent of first-time buyers had some help raising a deposit, either in the form of a gift or loan from family or a friend or through inheritance. This is up from around a quarter in the mid1990s.”
He added: “The good news is that for those that are able to raise a deposit, the cost of the typical monthly mortgage payment relative to take-home pay has been trending down in recent years.”
The research also looked at the cost of house prices in relato-earnings
tion to average annual earnings. Mr Harvey said: “At the end of 2020, the UK first-time buyer house price-to-earnings ratio stood at 5.2, close to 2007’s record high of 5.4, and well above the long-run average of 3.7.
“We have also seen a significant widening in the gap between the least affordable and most affordable regions.
“London has been the least affordable region for most of the past 40 years – the house price-to-earnings ratio in the capital reached a record high in 2016 of 10.2 and remained elevated at 9.2 at the end of 2020. Scotland currently has the lowest house price-toearnings ratio at 3.2, closely followed by the North [of England] at 3.3.
“Looking over the longer term, northern England and Scotland have historically seen lower house price
ratio ratios than southern England, Wales and Northern Ireland.”
The research also found that housing affordability is particularly challenging for people working in jobs such as construction and manufacturing, as well as for cleaners, couriers, and those in the care and leisure sectors, and other personal service jobs.
Within these groups, typical mortgage payments would represent more than 40 per cent of average take-home pay, the report found.
Nationwide’s most recent house price figures, for December, showed annual house price growth reached a six year high of 7.3 per cent. House prices ended 2020 some 5.3 per cent above the level prevailing in March, when lockdown hit the UK.