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Last Updated: Wednesday, 1 November 2006, 15:16 GMT
How hard is it to afford a house?
By Ian Pollock
Personal finance reporter, BBC News

How can anyone afford to buy a house for the first time?

Browsing an estate agents window
The costs of buying are daunting

The country has had a decade of almost continuously booming house prices.

They are still rising briskly and continue to outstrip the rise in people's incomes.

Yet mortgage borrowing is thriving with no obvious sign of a slowdown.

And warnings that high prices would inevitably choke off the supply of first time buyers and thus act as a drag on the whole market seem exaggerated.

How do they do it?

Research by Bradford & Bingley earlier this year suggested that 40% of first-time buyers now rely on their parents for financial help when buying a home.

The difficulty is getting a deposit together, rather than meeting the repayments
Bernard Clarke, Council of Mortgage Lenders

Half of those parents were contributing to the deposit while 17% were putting their hands in their pockets to help with the monthly repayments.

"The difficulty is getting a deposit together, rather than meeting the repayments," says Bernard Clarke, from the Council of Mortgage Lenders (CML).

"Lots of people in the industry are talking about assistance from relatives, for instance using the equity in their own properties."

So are parents really taking out top-up mortgages on their own properties to hand over large sums as cash deposits to their children?

"There is lots of remortgaging and lots of equity withdrawal going on, and lots of anecdotal evidence that people are doing this," says Clarke.

Buying in Bath

Christopher Bannister and his girlfriend Stephanie Vollmer are moving in together in Bath.

Stephanie Vollmer and Chris Bannister
Stephanie and Chris got substantial help from her parents

He works as a research officer at Bath University while she is just about to start a PhD there.

They are buying a house for 170,000 and her parents have given her 100,000 towards the deposit.

After looking around he realised that on their own incomes they could afford hardly anything they liked.

And living in rented accommodation meant that they were not able to save much either.

"We couldn't afford it on our own," says Christopher.

"So her parents kindly offered to lend some money.

"Lots of people get money from relatives like grandparents. I don't see how anyone can afford to buy otherwise, there's no other way. Just while we were looking prices were going up."

Older buyers

Currently, new borrowers typically put down a median average deposit of 10%.

First time facts
40% of first-time buyers get parental help
Only 20% of 20-24 year olds are home owners
First-time buyers now make up only 38% of the total
Mortgage repayments use up 42% of their take-home income

So half are likely to be putting down even more.

One reason they can afford it is that they may well be older with more money saved up.

The Nationwide building society recently estimated that 20% of apparent first-timers in 2005 were older people returning to the property market after a spell in rented accommodation.

So the real squeeze is on the young.

Only 20% of those aged 20 to 24, says the Nationwide, now own their own homes compared to 34% in 1994.

Stretched borrowing

It is well established that, using traditional lending criteria, someone on an average wage or salary can no longer afford to borrow enough to buy the average priced house in many cities and towns across the country.

But that has not deterred every would-be home owner.

This only serves to drive up house prices even more
G M, R, United Kingdom

In the first three months of this year nearly 89,000 mortgages were granted to first-time buyers, more than for the same quarter in any of the previous three years.

At the same time each home loan was, on average, worth 3.21 times the incomes of those buying the property.

Ten years ago the comparable ratio was just 2.39.

So the size of the typical mortgage relative to house prices has risen.

And if the median income multiple is now 3.21, that means that half of new loans are being lent at multiples even higher than that.

Low interest rates

Relatively low interest rates during the last decade or so - a reflection of low inflation - have been the key fact making it much easier to meet the payments on a big loan.

If the price is low then you can afford to consume more
Fionnuala Earley, Nationwide

The Nationwide's chief economist Fionnuala Earley says the cheaper the interest rate the bigger the loan you can take on.

"If the price is low then you can afford to consume more."

But as prices have outstripped incomes, some potential borrowers have clearly been driven away.

Throughout the 1980s and 1990s first-time buyers typically made up 50% or more of those borrowing for a house purchase.

Now they make up just 38% of all buyers and their proportion in recent years has at times fallen as low 27%.

Last month the Nationwide published figures which suggested that house prices might be reaching the limits of affordability.

It estimated that mortgage repayments, for those on the average income, now absorb 42% of their take home pay.

That was a much bigger chunk of their money than ten years ago when the current house price boom set in.

Back in 1996, repayments used up just 18% of first-time buyers' incomes.

So it seems that people, whether they be individuals or couples, are simply gritting their teeth and using up more of their incomes to finance their first step on the mortgage ladder.

Relaxed lending

Low interest rates have meant that lenders have been able to take a more relaxed attitude to giving out home loans.

Once upon a time, you had to save with a building society for two years before it would even consider lending you some money to buy a home.

Back in the 1970s this sort of thing was known as a "mortgage queue".

Then, your loan would probably be restricted to three times a single person's income or two and a half times that of a couple.

That has all changed because competition has forced lenders to be more adventurous.

And they are also more sophisticated in their analysis of what individuals can afford.

But one thing that borrowers need to remember is that interest rates may not stay low for ever.

Many would be hard pressed if borrowing costs were to rise significantly.

Then, the bank of Mum and Dad might not be able to help so easily.

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