Why The Credit Crunch Is Good News For First-Time Buyers

Here are five reasons why things are looking up for potential first-time buyers.

It's not fair, but when it comes to property ownership in this country over the past decade, first-time buyers have repeatedly drawn the short straw. The housing boom that has had millions of older homeowners cracking open the champagne has been nothing but bad news for first-time buyers.

According to the Royal Institution of Chartered Surveyors (RICS), first-time buyers now need to save £25,600 (up £12,351 from 2001) to cover the costs of buying a home, and some are borrowing more than six times their income in a desperate bid to get a toenail - never mind a foot - onto the property ladder.

The good news is that, true to form, the beginning of autumn is bringing change.  As the ramifications of five interest rate hikes, the US sub-prime mortgage crisis and the much-lamented global credit crunch start to hit home, there are signs that the inexorable rise of house prices we have seen over the past decade is about to become, well, exorable, and  a winter of discontent in the housing market may soon be upon us.

What does this mean for first-time buyers? Despite all the doom and gloom predictions for property prices over the past few weeks, the outlook is looking remarkably rosy for first-time buyers. If you are among the renting, saving and yearning masses, then here are five reasons why you should be celebrating:

• 1)  Lower interest rates. Before all the banks got their greedy fingers burnt by bad debt and Ninja mortgages, the future looked bleak for first-time buyers. The base rate was widely expected to rise 0.25% by the end of the year. Now, the base rate is believed to have hit the peak of its current cycle and some predict it may even fall to 5.5% or lower in the next six months. This means fixed rates are coming down, and is great news for first-time buyers on tight budgets, who need the security that the set monthly payments of a fixed rate mortgage provide.
  
  
• 2)  Greater supply of property. For more than a decade, buy to let investors have been profiting from the plight of first-time buyers, snapping up typical `first home' properties at prices first-time buyers cannot afford, only to turn around and rent them out to...? You guessed it: first-time buyers. Now, landlords appear to be worried that house prices have peaked - RICS reports that sales of buy to let properties have risen by 44% this year to their highest level for two years, which means there should be more `first homes' available to buy. 
  
  
• 3)   Less competition. Some mortgage lenders are tightening their buy to let mortgage criteria, reducing the amount investors can borrow from 90% of the property value to just 80%. That means landlords have to put down a bigger deposit, and cannot `gear up' (borrow to buy another property) as easily. Speculative buyers are also most likely to be put off by the fear of a housing market crash.
  
  
• 4)  Lower prices ... perhaps. The jury's still out on whether the price of property will actually fall, but I'm pretty sure that many homeowners will be getting jittery about the goings on in the market and so may be keener than usual to sell up, and quick. Whether this leads to a fall in current prices or simply means that the pace of price rises will slow down, will depend to a large extent on the strength of demand and supply in your local area. However, as a general rule, I'd say first-time buyers have a greater potential to wield their power as chainless buyers this year. In other words: it's time to start negotiating.
  
  
• 5)  More bargains. The increase in interest rates has already led to a record rise in repossessions by mortgage lenders, with RICS predicting there will be 124 repossessions a day in 2008. So you may be able to snap up a property at a cheap price, particularly if you buy at auction, where mortgage lenders tend to try to offload their repossessed homes.

Sounds good doesn't it? The bad news is, if you don't have a deposit, you are still going to find it tough. As a result of the credit crunch, fewer lenders are offering to fund 100% mortgages or adding extra conditions to the deal.

On the other hand, if you have a healthy 10% deposit and are not over-stretching yourself by borrowing more than you can afford to pay back, you now have a fighting chance of getting on the ladder at a more affordable level. 

It all depends on whether you, as a first-time buyer who is purchasing a home to live in, can afford to take a more long-term view of the market, and sit tight till prices inevitably start to rise again.

If you're thinking about buying for the first time, visit The Motley Fool's award-winning Mortgage Service and find a deal that's right for you.

More: Cheaper Fixed-Rate Mortgages | Beware 125% Mortgages