First-time buyers and the mortgage market – adapting to a changing mortgage scene

Current challenges in the market

First-time buyers (FTBs) are crucial to a properly functioning housing market as they underpin the mortgage industry. Building Societies and Lenders want to help more people into homes against a backdrop of projected fewer mortgages. This includes a focus on FTBs. With net interest margins likely to be squeezed over the next few years^[1], lenders will have to be more creative and potentially consider niche lending.

According to recent research by Leeds Building Society^[2], there’s a projection of over 400,000 fewer mortgages over the next five years, with buyers looking to options such as extending their mortgage terms to cope. This trend indicates a potential risk of customers being priced out of the market without intervention.

Our data shows that approximately 1 in 3 new mortgages are to FTBs and despite lending being down c. 22 percent in 2023 compared to 2022, we are seeing some resilience in the market. Borrowers have increased terms to overcome affordability hurdles, rising to over 30 years on average. Despite this, the FTB average monthly payment is £400 a month more now compared to just two years ago. Only recently, we have seen the Halifax reduce the maximum age limit from 75 to 70^[3] as they seek to reign in risky lending for many borrowers, thus increasing monthly mortgage payments.

Research has shown that 1 in 10 FTBs under 45 will have had help from the “Bank of Mum and Dad”, rising to 28% for those under 25^[4]. This research suggests first-time buyers given a leg-up by the “Bank of Mum and Dad” enjoy a four-year head start in getting on the property ladder. They can also put down bigger deposits, borrowing less to do so. With cost and rate pressures continuing, there has been a decumulation in savings during 2023, however there are still excess savings in the household sector compared to historic trends due to levels built up through the pandemic period in 2020 and 2021^[5].

We also see a greater proportion of FTB mortgages with 3 or more named individuals on the mortgage, suggesting some FTBs are buying with friends to get on the housing ladder. There is a higher concentration of those with 3 or more named holders on a mortgage in London where the concentration is double the overall average.

Three key barriers for first-time buyers

The following pose significant hurdles to homeownership:

1. Deposits – ability to save enough for a deposit
2. Affordability – ability to afford monthly repayments
3. Credit Worthiness – potential thin credit file history for younger applicants

Innovative solutions to address challenges

To tackle these barriers, lenders are beginning to explore innovative solutions. One such approach is the concept of dynamic ownership, which formalises support from friends and family. By turning the home into a shared platform and facilitating loans for deposits or assistance with mortgage payments, lenders are enabling more aspiring homeowners to enter the market.

Another innovative strategy is the introduction of income boosters, where family members contribute to mortgage payments, recognised as equitable interests in the property. These initiatives have proven successful, with a significant percentage of aided buyers securing mortgages they otherwise couldn’t obtain.

Skipton Building Society identified a potential area of underserved borrowers, launching a product which allows renters to use their proven rental payment history to demonstrate ability to pay.

We launched the track record mortgage product just over a year ago following identification of an underserved area of the market of people trapped in rental cycles. We are really proud to have helped more people buy homes. Going forward we will continue to look at innovative solutions optimising new data and technology to help more people onto the property ladder.

Jen Lloyd, Head of Mortgage Products and Propositions, Skipton Building Society

Longer-term fixed rate is another potential solution, as it enables buyers to borrow more, compared to a stress test against a 2-year fixed product that reverts to an SVR which is typically above 8 percent. Getting customers on long term fixes is a potential option that the government may need to support.

While deposits and affordability remain primary concerns, creditworthiness is also a crucial factor. Recent advancements, such as Experian Boost, have shown promising results in helping individuals with previously declined credit profiles secure mortgages. Experian Boost allows FTBs to boost their credit score using their everyday transactions, such as debits, credits, council tax and digital entertainment payments. It aims to help FTBs and consumers with potentially thinner files, increase their credit score. A number of lenders have adopted Boost as a way to help “aspiring homeowners” take the first steps onto the property ladder.

Government schemes

The Mortgage Guarantee Scheme offers FTBs and existing lenders the option to mortgage up to 95% of the property’s value. Since launch it has only accounted for 1.6% of all UK residential mortgage completions, likely due to the scheme being hampered by low borrowing limits, making it perhaps less helpful in more expensive areas such as London.

Shared Ownership mortgages allow borrowers to buy a share of their property at first and pay rent to the housing association or landlord for the rest. Several of the high street banks as well as smaller and specialist mortgage providers offer this solution.

The First Home Scheme offers new-build homes to first-time buyers (with a combined household income of less than £80,000 per year (or £90,000 in London) and who meet other criteria, at a 30-50% discount on market value supporting FTBs with more affordable options.

The Right to Buy scheme which allowed council tenants to buy their home at a discounted price was extended in 2022 to housing association tenants.

The Building Societies Association has stated that supporting FTBs requires new thinking to make homes more affordable. Their recent report has suggested 3 key changes:

• Review relative costs and benefits of stricter regulatory environment versus those of higher ownership to strike the right balance.
• Change regulation to allow mortgages to be more flexible.
• Review the 15% cap on lending at 4.5 x income, including whether it should specifically support FTBs.

Whilst innovative solutions and government support can go some way to addressing the challenges, an increase in more affordable housing is being seen as the most important factor. By stimulating demand from FTBs and having innovative products from lenders without the houses to buy, prices may continue to rise, potentially pricing more FTBs out of the housing market.

Future opportunities and challenges

In the next 12 to 18 months, lenders anticipate both opportunities and challenges in the evolving mortgage landscape. While the challenging environment demands innovative solutions and heightened customer focus, it also presents opportunities for growth and differentiation.

Our recent analysis indicates a significant population where there is opportunity for growth in the FTB market with a significant proportion of applicants having both a high-quality credit score and mid to high levels of disposable income.

Lenders can mine this data to understand and profile different segments and growth opportunities and use lender and off- book data to build scorecards and policy to grow their FTB business.

Key opportunities lie in developing tailored products for first-time buyers, leveraging technology for automation and efficiency, and adapting quickly to market changes. However, maintaining a balance between consumer needs, regulatory compliance, and business objectives remains paramount.