United Kingdom

Average first-time buyer must save more than a YEAR'S salary for a deposit on a home

The average first-time buyer must save more than a year's salary to put down a deposit on a house, according to new data.

A 20 per cent deposit on a home now equates to 104 per cent of annual pre-tax income of the average worker, Nationwide Building Society says.

This figure, which applies to the last three months of 2020, has increased from 87 per cent ten years ago according to Britain's second-largest mortgage lender. 

 First-time buyers must save on average 104 per cent of their salary for a deposit on a home

The amount of time it takes first-time buyers to save up a deposit varies depending on where they live. 

In London they will save for an average of 16 years, but in Scotland and Nationwide's North region - which roughly equates to the North East - it is less than six. 

Andrew Harvey, chief economist at Nationwide, said: 'We have seen a significant widening in the gap between the least affordable and most affordable regions. 

'London has been the least affordable region for most of the past 40 years - 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.

First-time buyers could need to save for 16 years to afford a deposit for a home in London

'Scotland currently has the lowest house price to earnings ratio at 3.2, closely followed by the North at 3.3. 

'Looking over the longer term, Northern England and Scotland have historically seen lower house price to earnings ratios than Southern England, Wales and Northern Ireland.'

As a result of these affordability issues, more first-time buyers have been taking advantage of financial help from family and friends.

Nationwide said that around 40 per cent of first-time buyers had help raising a deposit in 2018-19, whether that was through a gift or loan, or an inheritance. This was up from around a quarter in the mid-1990s.

Mortgage payments remain more affordable 

Although raising a deposit was more of a challenge, the research found that monthly mortgage payments were still affordable for most - unless they lived in London and the South East.

It said first-time buyer mortgage payments were currently at 28 per cent of take-home pay, which was slightly below the long-term average.

Monthly mortgage payments are generally more affordable than deposits 

Harvey said: 'Affordability improved significantly between 2007 and 2009, primarily due to the fall in house prices in the wake of the financial crisis, and remained low, thanks to the decline in borrowing costs to all-time lows.'

However, despite monthly costs being easier to manage, first-time buyers have been taking out longer mortgages in order to further decrease their payments.

Last year, around 70 per cent of first time buyers took out a mortgage with an initial term of more than 25 years, up from 45 per cent in 2010.

Increasing the mortgage term from 25 to 35 years increases the total amount of interest paid on a typical mortgage by 40 per cent. 

'Over the past decade, an increasing proportion of first time buyers have been opting to take out long-term mortgages to further lower their monthly repayments - though this increases the total amount repaid over the life of the mortgage,' Harvey said.

Near record high: The first-time buyer house price earnings ratio is well above the long run average

House price to earnings ratio near record high

The Nationwide data also shows that over the past few years, earnings growth has broadly kepy pace with property value growth.

This means that the house price to average earnings ration has remained at a fairly similar level – but at a high level.

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

The report also shows a ‘significant widening in the gap’ between the least affordable and most affordable regions.

In London, the ratio stands at 9.2x, while in Scotland it is 3.2 and in the North 3.3.

Big gap: Buying in London requires a far bigger salary than elsewhere

What about those with smaller deposits?

The Nationwide data looked at buyers who put down a 20 per cent deposit on their first home. 

However, most first-time buyers get on the housing ladder with a 10 per cent deposit.

These mortgages have recently returned to the market after being pulled by lenders due to the effects of the pandemic.  

Having a 10 per cent deposit would mean that the time it takes a first-time buyer to save up might be shorter, and the proportion of their salary that they need to use lower. 

However, their monthly repayments would be higher, and they may also choose a longer term. 

The figures from Nationwide also show how hard it has become for those buying solo, without the combined help of a partner. 

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