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Is the first rung on the property ladder broken?

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    Is the first rung on the property ladder broken?

    http://news.bbc.co.uk/1/hi/business/8002791.stm

    Prospective first-time buyers must think they have walked under the property ladder, rather than stepped onto it, such is their run of bad luck.

    Traditionally, falling house prices are good news for those looking to buy for the first time. After a decade of watching the UK property market become increasingly bloated, these people would have watched it deflate with some relief.

    But despite homes becoming more affordable, buyers looking to get on the ladder have found the first rung to be broken.

    The global financial crisis has left lenders extremely cautious about taking on new, untested creditors without these buyers offering a big deposit upfront.

    Take the case of Sean McAuley, a music teacher from Kettering. Having turned 40, and spent all his adult life as a tenant, he decided it was time to invest in his own place.

    But despite getting regular work as a supply teacher, lenders were seemingly wary of his ability to repay a home loan because he was a first-time buyer.

    He accepts that some of these banks may have been stung by the irresponsible borrowing of others in the past.

    "You can borrow and borrow, but you've got to pay it back," he says.

    He seems like a perfect customer. He had saved hard in the previous few years to raise a deposit of about 10% of the value of the home he wanted to buy.

    But hardly any lenders were happy to consider his custom.

    "Eight months earlier, I could have taken my pick from about 20 [lenders]. By now it was down to two," says Sean, who had to rule out deals requiring a 25% deposit.

    He then had to wait five or six weeks to get approval for the mortgage. At the height of the boom, this sort of deal gained almost instant acceptance.

    "They left me on tenterhooks. They were very stringent. The length of time was a surprise, at one point you could have got a mortgage in ten minutes," he says.

    TIPS FOR FIRST-TIME BUYERS
    Don't swap bank account just before applying for a mortgage
    Have a credit card or two that you pay off every month
    Make sure you are on the electoral roll
    Be prepared to stay in the same home for some years

    At a peak at the start of February 2008, there were 1,197 deals available at this level. By the start of April this year the number had fallen to 93, according to financial information service Moneyfacts.

    In its last mortgage data report, the Council of Mortgage Lenders said first-time buyers typically had to find a deposit of 25% - a record amount. Only 9,400 home loans were completed for first-time buyers in February, down 46% on a year earlier.

    "Such amounts remain out of reach for all but the most affluent buyers," says the CML's Michael Coogan.

    As a result, the bank of mum and dad came into play for young buyers. Older buyers, such as divorcees, made up a greater proportion of new borrowers.

    The Royal Institution of Chartered Surveyors agreed that it was tough for first-time buyers.

    The scraps of comfort among recent housing surveys came from the government's data.

    The price buyers were paying for their first home in February was 15.1% lower than a year earlier, according to the Department of Communities and Local Government. That was a swifter decline in prices than the UK average of 12.3%.

    Buyers' market

    It is a picture of the market that Sean McAuley recognises. After getting his mortgage, he had little trouble in getting the price of his chosen property reduced.

    "It is a dead market," he says, as a freezer is delivered to his new home. "I felt in a position to knock them down; it is a buyers' market."

    He is now happily installed in his new home facing the joys of DIY.

    So what tips are there for other first-time buyers hoping to get into the same position but struggling to get a mortgage?

    Ray Boulger, of mortgage broker John Charcol, says there is a series of elements that a picky bank or building society will look for as evidence that you are a good borrower.

    To maintain a good credit score, potential borrowers should make sure they are on the electoral roll, should not change their bank current account just before applying for a mortgage, and ensure they have one or two credit cards that they keep on top of.

    All of these show that a borrower can be trusted to keep credit under control. So, somebody with credit cards which they use and pay off in full at the end of the month is a better option than a wannabe borrower with no credit history and a small pot of savings.

    Many lenders want a history of addresses so it is worth ex-students who lived in the university town for half the year and at their parents' home during holidays to put the family home as the principal address, Mr Boulger says.

    How long to fix?

    So which kind of mortgage should these first-time buyers choose?

    According to Mr Boulger, a five-year, fixed-rate home loan looks like the best option at present for those looking to borrow 85% or 90% of a property's value. Very few tracker deals are available at this loan-to-value level.

    "For most first-time buyers the mortgage will be their biggest monthly payment. They tend to be more likely to take comfort from a fixed rate by knowing what they are paying," he says.

    With house prices still falling, those buying a home now are unlikely to have any equity in the property for two or three years so they might want to think more long-term and be prepared to live in the same house for some time.

    Mr Boulger estimates that a 10% increase in value is needed to cover the costs of moving - such as legal fees - to a property of the same value.

    And while getting a two-year fixed-rate mortgage might lead to cheaper repayments in the short-term than a five-year deal, when it comes to renewing, interest rates are likely to have risen again.

    "There will be some initial pain to secure for the long-term," he says.

    #2
    Good stuff - banks should not loan out unless deposit is 25% of value and no more than 3 times salary.

    Give 2-3 years of these rules and property prices will fall to sensible levels.

    Comment


      #3
      Originally posted by BrilloPad View Post
      But despite homes becoming more affordable, buyers looking to get on the ladder have found the first rung to be broken.
      Bottom rung isn't broken at all. It's just positioned where it should be - out of reach of people that don't have good deposits, salary/loan ratios etc.

      Comment


        #4
        Originally posted by centurian View Post
        Bottom rung isn't broken at all. It's just positioned where it should be - out of reach of people that don't have good deposits, salary/loan ratios etc.
        A very niave outlook imo. With the price of the average house being roughly £175k how, are average people ie my son and the like, going to save £17.5k never mind 25% of that?

        The real trouble is feckless lending to people with 'buy for let' greed and banks lending huge amounts to sub prime borrowers.

        The bottom rung is now out of reach of all but people who are divorcing and will more often than not, have a substantial deposit to put down as proceeds from a sale.
        I couldn't give two fornicators! Yes, really!

        Comment


          #5
          Hyperinflation is the only thing that rebalance the craziness present in house prices, public sector and Friday night chat show host salaries.

          Comment


            #6
            Originally posted by TimberWolf View Post
            Hyperinflation is the only thing that rebalance the craziness present in house prices, public sector and Friday night chat show host salaries.
            Shawly not Jonathan Woss!
            'Orwell's 1984 was supposed to be a warning, not an instruction manual'. -
            Nick Pickles, director of Big Brother Watch.

            Comment


              #7
              I noticed tonight that Barclays / Woolwich have restarted their flexible mortgage ad campaign on ITV. Whilst watching it, the thought going through my head was what's the point in that when you're not lending to anyone.

              Since mainstream TV ads are so expensive and they're not going to improve their 'sales' with this, I reckon it's a case of spending the last of budget before applying for a government bailout.
              Moving to Montana soon, gonna be a dental floss tycoon

              Comment


                #8
                Originally posted by BolshieBastard View Post
                A very niave outlook imo. With the price of the average house being roughly £175k how, are average people ie my son and the like, going to save £17.5k never mind 25% of that?.
                WHS.

                House prices are still configured for abnormal market conditions and easy access to credit. Widespread price correction has yet to happen.
                In my area prices haven't come down much at all.

                It was a real struggle buying our first house near top of the property bubble in 2007, and that was with only a 10% deposit. It was also very dishartening to find that we could only just afford housing in places with people earning about half of our combined incomes. We thought if we could only just afford to buy here, what about the next generation of people doing their jobs?? (obviously sub-prime lending had a part to play here)

                Originally posted by BolshieBastard View Post
                The real trouble is flipless lending to people with 'buy for let' greed and banks lending huge amounts to sub prime borrowers.
                At least some of them are being punished. Having seen these two on Hells Kitchen recently, this article always makes me chuckle.
                http://www.dailymail.co.uk/news/arti...it-crunch.html

                Comment


                  #9
                  Originally posted by BolshieBastard View Post
                  A very niave outlook imo. With the price of the average house being roughly £175k how, are average people ie my son and the like, going to save £17.5k never mind 25% of that?

                  The real trouble is flipless lending to people with 'buy for let' greed and banks lending huge amounts to sub prime borrowers.

                  The bottom rung is now out of reach of all but people who are divorcing and will more often than not, have a substantial deposit to put down as proceeds from a sale.
                  But should your sons first property be the instant average house? I'm not suggesting prices are cheap or similar, just that expectations might be overinflated.

                  In my area of the south west a 2 bed flat - surely a reasonable first time buyer type property - can be had for between 75 and 110k. Ok, average salarys of people at that stage of their lives are only in the region of 18k - so it is still fairly challengeing, but it is more affordable than it might seem (or probably less unaffordable).

                  Certainly the first rung of the property ladder is still very difficult - but it has always been.

                  Edit: The point you make about divoricng people etc is very accurate and further distorts things. Typically people established in property ownership seem to end up selling up this circumstance and buying 2 ftb type properties between them. This does support this end of the market. A large number of chains seem to start from divoricng people trading down rather than an FTB.
                  Last edited by ASB; 26 April 2009, 22:16.

                  Comment


                    #10
                    Originally posted by BolshieBastard View Post
                    A very niave outlook imo. With the price of the average house being roughly £175k how, are average people ie my son and the like, going to save £17.5k never mind 25% of that?
                    So your "solution" is to reduce deposits?

                    The solution is for prices to come down to sensible level - that's the net positive effect of x3 salary and 25% deposit, it allows to keep sale prices under control.

                    Comment

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