With the costs of living increasing and house prices at the highest we have ever seen, I wanted to take this week's blog to look at how the average price of property within Chichester might be getting too much for First Time Buyers. To do this, I will compare the average cost of property within Chichester with the average salary in the UK and see how much First Time Buyers need to earn and require as a deposit to buy their first home within Chichester.
Firstly the data we are using will be taken from various places such as Land Registry for house prices and then ONS figures for the average UK salary for the tax year 2020/2021. I decided to use the average UK salary rather than the average salary within Chichester because I want to look at including salaries that could be looking to move to the area.
Chichester's average house price.
Let's start by looking at data taken from Land Registry and how house prices have increased from February 2021 to February 2022 in Chichester. In February 2021, Chichester had an average house price of £405,664, ut we have seen this rise to £454,890 for the latest figures February 2022. Now you may think the average first-time buyer will not be looking at the top end of the average house price, but we can look to break this down into property types.
The average house for a detached property at the end of February 2022 was £732,705. We see a semi-detached property drop to £433,732, followed by a terraced property at £373,442 and flats with an average of £227,786.
Now that we have seen the average property price data let's look over the UK's average salary.
The UK's average salary.
Firstly, the average UK salary in the tax year 2020/2021 sat at £38,600 for full-time and £13,803 for part-time. However, due to this report being around first-time buyers, we need to focus on the average age of a first-time buyer, which is 32, according to a recent report published by Halifax.
You may be pleasantly surprised that the average salary bracket a 32-year old falls into (30-39) holds an average salary of £38,317 for full-time and £15,096 part-time, which is slightly above the national average.
Let's look at a typical first-time buyer using the above information.
The first part I want to touch on is that being a first-time buyer isn't as straightforward as being 32-years old and earning £38,600 per year, and gaining a mortgage. We may need to factor in other parts of a 32-year olds lifestyle or family setup.
When looking at other national averages, most first time mothers are aged 29.1 and first-time fathers 30.9. This statistic shows that if we look at a 32-year old first-time buyer, they will be in a family scenario, meaning at least 2-adults and 1-child. We then look at the average national debt on unsecured credit, £2,112 on credit cards and £3,745 on unsecured loans.
We can say from the above scenario these first-time buyers would be looking for a family home and perhaps one they can grow into as well. For this reason, they are looking for a terraced or semi-detached property. However, I will make this even more geographical and say the clients are looking to purchase within the Parklands area of Chichester, and they have found in Oliver Whitby Road, which the average semi-detached currently sits at £351,000 according to Rightmove.
How does a mortgage application work for first-time buyers?
We will look at how much these first-time buyers could look to borrow from a mortgage lender, but I will be looking at this over 2-scenarios. Firstly, we need to understand that all mortgage lenders lend different amounts and assess scenarios differently.
I also want to assess this on the buyers having access to a 5% deposit, which is the minimum requirement to purchase a property without using any family backed lending schemes. This will give the first-time buyers a deposit of £17,550.
Scenario 1
Within this scenario, I would like to base the affordability of high street lenders. We shall also be assessing the mortgage on one of the first-time buyers working part-time as they have a child at nursery and family help with the other little bit of child care, meaning no child-care costs to be considered.
Joint income = £53,413 (£38,317 + £15,096)
Credit card debt = £2,112
Unsecured loan payment = £179 per month (£3,745 outstanding balance)
With this scenario above, the clients would be looking at a maximum borrowing of £240,358.
As you can see, we are seeing a substantial shortfall of £92,862 to enable them to purchase a property at £351,000. A rather significant issue around this would be the time it would take them to save the additional deposit. According to research, the average monthly amount a household will save is £180 per month. However, when writing this blog, we know that the cost of living will soon not allow this to happen for the average family, and even if they could continue this amount, it would take over 42-years to save £92,862 on £180 per month.
This then leads me on to the following scenario.
Scenario 2
Instead of looking at the high street lenders, we have recently had some smaller lenders come to the market with a slightly different affordability model. We still keep the same family setup and household debt with a 5% deposit, and suddenly with another lender, they could look to borrow up to £320,478. Now, this doesn't provide them with the exact amount of borrowing required and still leaves them with a shortfall of £12,972, which is much more achievable than the previous £92,862.
What is the difference between these mortgage lenders to allow a substantial difference in borrowing?
We have typically run our mortgages on initial deals with the lenders in the UK, such as 2, 3, and 5-year fixed-rate deals, or sometimes tracker mortgages. Once these incentive periods finish, we then look to remortgage and find another new product, and this continues throughout our mortgage life. However, in recent research, a lender (Habito) suggested that 27% of mortgage holders are currently on the SVR rate, which is typically a lot higher than fixed and tracker deals.
When we compare this to the States (USA), they offer mortgages fixed for the duration of the mortgage life.
You might think, 'why has he mentioned mortgages in the USA?' This is how the lender in scenario-2 has enabled a better affordability model. They are utilising the same method of fixing the mortgage for its entire term to allow a better affordability model.
Currently, the FCA has strict guidelines around lending amounts and affordability models; however, this is currently under review, and we hope to see a conclusion on this around May 2022. But at the moment, the FCA and the FPC state the following;
o The LTI flow limit limits the number of mortgages that can be extended at Loan To Income ratios at or above 4.5 to 15% of a lender's new mortgage lending.
o The affordability test builds on the FCA's MCOB framework and specifies a stress interest rate for lenders when assessing prospective borrowers' ability to repay a mortgage.
Essentially, the above means they cannot lend more than 4.5 times income on 15% of new business. It must be run through an affordability model at a set interest rate, generally around 7%, which stops the higher amount of borrowing.
The lender in scenario-2 has managed to take out the affordability test at 7% due to the mortgage being fixed for life, and they run the affordability on the rate you gain for the mortgage life. This also allows them to lend up to 6 times the household income, rather than the 4.5. When looking at this route, though, you have to understand that you are tied into this lender for life, and if you ever wanted to change mortgage lender, you would have an Early Repayment Fee to leave them.
The lender allows a few scenarios in that the early repayment charge is non-payable, and they are as follows;
o The property is sold to repay the loan.
o The loan is repaid in full using the customer's own funds (for example, from savings or income). If this loan is repaid using money borrowed from another lender and secured against the security property, the early repayment charge will be charged.
o If any customers die, who is named as a borrower on this loan.
Overview
Going back to the original question, Is Chichester becoming too expensive for first-time buyers? If you want more of a traditional mortgage, it is difficult for the average first-time buyer and the initial deposit they would require. However, the new approach that this lender has taken with the fixed for term mortgage will undoubtedly help the average first-time buyer.
I hope this blog has been helpful, and if you are a first-time buyer looking to start your mortgage journey, please do not hesitate to get in touch.