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Last Updated: Monday, 20 November 2006, 10:12 GMT
Risks grow for first-time buyers
By Julian Knight
Personal finance reporter, BBC News

A graph
Britain is a country divided.

A country divided between housing haves and housing have-nots.

Each time a new house price survey is published - almost inevitably showing prices rising to a new record high - you can almost hear the groans from Britain's army of would-be first-time buyers.

With each month that passes, greater numbers of people are seeing their property-owning dream disappear over the horizon.

The reason is simple. House prices have been racing away from incomes.

According to the Halifax, house prices have risen by an average of 187% across the UK since 1996.

The average UK house price has risen from 62,453 in the first quarter of 1996 to 179,425 in the third quarter of 2006 - an average increase of 10.6% a year, way ahead of income growth.

One mortgage firm now looks at how much rent the applicant is paying and lends according to that
Helen Adams, Firstrungnow

But many first-time buyers, egged on by lenders, are refusing to accept the inevitable.

They are borrowing larger amounts than ever before, making use of shared-ownership schemes, clubbing together to buy, or relying on parents for deposits and as guarantors.

Complex picture

Over the past two years, the percentage of homes being bought by first-time buyers has actually risen from 28% to 35%, the Council of Mortgage Lenders (CML) has said.

In London - which tends to set the pattern for the rest of the country - estate agents have reported surging interest from 20- and 30-somethings.

What is happening? Is it just desperation on the part of first-timers over-extending themselves financially to get on the ladder?

There seems to be an element of this, but overall the picture is more complex.

BBC News examines the lengths some first-time buyers will go to get on the property ladder
Some first-time buyers will go to extreme lengths

The CML says that since April 2005, the average size of first-time buyers' mortgages in relation to salary, called the income multiple, has risen from 2.99 to 3.27.

Doing the sums, first-time buyers earning 40,000 in April 2005 were borrowing about 120,000 on average. Just 16 months later, they were borrowing more than 130,000 on average.

But some are clearly stretching themselves far further than the average 3.27 times salary.

"These figures reflect the whole market, including people who have help from parents, those on high salaries and people who have stepped off the ladder for a few years, having made money, and are buying again. All these people bring down the multiple figure," says Fionnuala Earley, group economist at Nationwide.


Income multiples closer to five are not uncommon.

Last month, Abbey became the first major High Street lender to announce that it was now offering five times salary.

The old income multiple test is fast disappearing. These days, for many lenders, the buzzword used is "affordability".

This means, instead of the lender crudely multiplying salary to work out if the borrower can manage repayments, all sorts of factors are looked at, such as outgoings and future earnings prospects.

Houses and for sales signs

"The big change in the market in recent times has been lenders moving to affordability," says Helen Adams, managing director of Firstrungnow.com, a website dedicated to providing advice for first-time buyers.

"One mortgage firm now looks at how much rent the applicant is paying and lends according to that.

"Another lender works out how much rental income can be earned from the borrower letting out a spare room and adds this to the amount of money they are willing to lend," Ms Adams added.

But the suspicion is that this is just smoke and mirrors and, in a highly competitive market where lenders are scrapping for business, "affordability" is really just lenders jiggling the sums, so they can lend more cash before another firm does.

"It is certainly true that in many instances, the affordability test is really a way of working out a high income multiple," says Andrew Montlake, director of mortgage brokers Cobalt capital.

But Ms Earley denies that lenders are going too far with the "affordability" concept.

"It is about lenders making the right decision according to the individual's full circumstances, not just salary," she says.

"After all, it is in no one's interest to lend money to people who will struggle to repay it. Lenders always lose if they have to repossess."

Double jeopardy

However, increasing numbers of borrowers are playing a game of double jeopardy, mixing borrowing on high salary multiples and also opting for an interest-only mortgage.

The danger comes when someone goes for [an] interest-only [mortgage] purely because it is cheap and puts nothing in place to pay the capital sum back
Andrew Montlake, Cobalt Capital

"Interest-only" means that monthly mortgage payments only go to pay off the interest on the debt. At the end of term, the capital - the original amount borrowed - is still outstanding.

The sudden popularity of interest-only mortgages is striking. Three years ago, just 6% of all mortgages were interest only. Today, the figure is 16%.

The big advantage as far as hard-pressed first-time buyers are concerned is that monthly repayments are lower.

"An interest-only mortgage can make sense for some - say people who plan to move in a couple of years - but not for all," says Mr Montlake.

"The danger comes when someone goes for interest-only purely because it is cheap and puts nothing in place to pay the capital sum back. They get to the end of their mortgage term, nearing retirement, and they still owe a lot of money."

Shared ownership

A few years back, shared ownership was seen as a potential panacea, the way forward to help would-be first-time buyers on to the ladder.

There are several models of shared ownership. The most common is when buyers borrow in order to purchase a share of the property, then pay rent on the part of the property they have not bought.

The idea is that over time, homebuyers increase their share of the property.

But shared ownership has had little impact in the market, with schemes often limited to "key workers" in the public sector.

Grouping together

For many people, no amount of financial juggling or shared ownership schemes provides the answer.

Put simply, they do not earn enough or have too many financial commitments to afford property.

Often, the problem for these people lies with saving enough for a deposit.

Even those that do save can find that house prices race away from their savings. As for 100% mortgages, they are not that widely available, are relatively expensive and very exposed to negative equity.

Facing such barriers, increasing numbers of people have been opting for a group mortgage.

This is when up to four friends - or in some cases acquaintances - club together to purchase property.

HSBC has reported a 50% surge in group mortgages during 2006.

"Group mortgages are very much of the moment. The obvious advantage is the debt, deposit and stamp duty is spread between the purchasers," Ms Adams says.

Several websites offer to put strangers in touch with one another so that they can buy property.

"People can enter what they want from a housemate, a bit like a dating website," says Ms Adams.

"Buying with friends is normally a last resort - buying with strangers is beyond that for many."

But for every new survey showing house prices rising, more and more would-be first-time buyers are likely to become less fussy.

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