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First-time buyers pay 40% more for longer mortgage terms

Written by: Lana Clements
More first-time buyers are taking out long-term mortgages to lower their monthly repayments, even though this increases the total amount repaid over the life of a mortgage, analysis has found.

Low mortgage rates mean repayments as a share of take-home pay are close to a historic average, according to Nationwide.

However, in 2020, around 70% of first-time buyers took out a mortgage with an initial term of over 25 years, up from 45% in 2010.

Increasing the mortgage term from 25 to 35 years – the most popular option – increases the total amount of interest paid on a typical mortgage by 40%.

Deposit is biggest barrier for first-time buyers

High house prices compared to average earnings make raising a deposit the biggest barrier to ownership for first-time buyers.

The lender found that the typical first-time buyer hoping to raise a 20% deposit would need to save more than their total pre-tax annual income.

At the end of 2020, the first-time buyer house price to earnings ratio stood at 5.2, close to 2007’s record high of 5.4, but well above the long run average of 3.7.

With the highest home values, London is the least affordable region for those looking to get a foot on the property ladder.

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.

With lower home values, the North and Scotland are the most affordable regions with ratios of 3.3 and 3.2 respectively.

Around 40% of first-time buyers in 2018/19 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 mid-1990s.

Andrew Harvey, senior economist at Nationwide, said: “One of the consequences of high house prices relative to earnings, is that it makes raising a deposit a significant challenge for prospective first-time buyers.

“Indeed, at present, a 20% deposit is currently equivalent to 104% of the pre-tax income of a typical full-time employee, up from 87% ten years ago, although there is significant regional variation.

“The good news is that for those who 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.”

Affordability is most challenging for those working in areas classified as ‘elementary occupations’, which include jobs such as construction and manufacturing, labourers, cleaners and couriers, and those in care, leisure and other personal service jobs.

In these groups, typical mortgage payments would represent over 40% of average take-home pay.

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