Why Homebuyers Can Afford To Be Patient

Neil Faulkner explains why first-timers could afford to be patient even if property prices were rising!

Using data for the past 25 years, house prices increase, on average (i.e. it does vary by property and region), by 8% per year. However, salaries increase by, perhaps, just 3% per year. So it's not surprising then that many renters are desperate to buy a property, yet find it so hard to do so. True, property prices have slumped a little in the past six months. No one can know what will happen over the next six. But I intend to show you why you can afford to be patient even when prices are rising. Your deposit helps To start with, you can grow the size of your deposit faster than house prices grow. This helps to partially offset the fact that your salary is not keeping pace with house prices. Here's an example. Let's start by taking the average price that first-time buyers pay. Nationwide and Halifax's house-price data combined shows an average figure of about £150,000. However, I want to take a more pessimistic figure to emphasise my point. Let's say it's £160,000. Now let's say you're determined to get on the ladder, so you're budgeting well and therefore saving £500pm towards a deposit. At the end of year one you have a £6,000 deposit. House prices, on average, will have risen 8%, so they have gone from £160,000 to about £173,000. This means you now have a 3.5% deposit for your property. After year two, the average property is worth £187,000, but you now have a deposit of £12,000, or 6.5%. As it's more than 5%, this is enough to start comparing mortgage prices (now that 100% mortgages with no deposit have been withdrawn). You could continue this on for four more years: you save £500pm/£6,000pa, whilst house prices go up by the average of 8%. In four years, first-time-buyer prices are now around £218,000. But you also have a deposit of £24,000, which is 11%. So, because you're putting a healthy-sized sum aside every month, your deposit is gaining. This is despite the fact that property prices are going up quickly. The added bonus to having a bigger deposit is that, if you need to sell your home in a hurry, you're more likely to be able to do so. Your salary Of course, your salary goes up more slowly than house prices. Even so, along with your increasing deposit, an average increase (roughly) of about 3% per year still helps to get you a property you can actually afford. I'm going to assume you're buying with someone else, because that is more common. Buying on your own is simply out of the affordable reach of too many people. Average combined household salaries are, at present, a little over £46,000 (according to a report by Fool's Head of Personal Finance, David Kuo). This will give you a salary multiple of 3.5 times earnings today for a property worth £160,000. But in two years you might expect the property prices to creep up to 3.6 times earnings and in four to 3.7 times. So, yes, the prices are steadily getting worse, despite your efforts with the deposit. Swings and roundabouts However, if you have no deposit at all, you simply won't get a mortgage these days. Furthermore, if you have just a little deposit, you'll be offered abysmal deals. Whereas, if you have a big deposit, you'll have access to a lot more deals and therefore you're much more likely to get a better one. Mortgage deals available depending on your deposit size Deposit (%) Salary multiple Mortgages available? Choice of lenders Year zero 0 3.5 None None Year two 6.5 3.6 Around 40 A handful Year four 11.0 3.7 Around 80 Around 25 So, although your salary multiple goes up slowly over time, you will likely pay less in interest and charges because there is more competition for your business. These cheaper mortgages should offset the small difference in the salary multiple. What if you already have a deposit? Let's say that right now you already have a 10% deposit, so that is £16,000 on a £160,000 mortgage. Your salary multiple now is just 3.1. However, should you save £500pm for a little over five more years you would have a 20% deposit (always assuming house prices in your area grow at an average 8%). Your salary multiple will have risen to 3.5, but you also have around 180 mortgages to choose from. That's more than double what's on offer now, so you can expect to get far better deals. An aside...Mortgages have been rapidly disappearing from the market recently, so it's harder to get a good deal. But if lenders start lending more responsibly, they'll be able to offer more loans again in the future. That will mean you'll have even more deals to choose from. Also, you may have noticed that house prices in many areas have fallen this year. House prices have risen well above the long-term average of 8% over the past five to ten years, which likely helps to explain the recent declines. With a little luck, first-time buyers will see them fall further before they revert to the long-term average of 8% again. But I don't want to go down the ugly road of predicting short-term prices, so I'll leave those thoughts there... Affordability It's all very well looking at salary multiples, but what's important is how much the deal actually costs you in fees and monthly repayments, and also the total cost over the length of the deal. Remember that 'affordability' means that you can afford the initial repayments, but it also means you could afford the repayments if interest rates went up one or two percentage points. Also, you have to look at your own expenses. in particular, consider if you can afford the additional costs of being a homeowner, e.g. maintenance and additional insurances? Still, if you're paying between three and four times your salary and saving £500pm, buying should be affordable for many or most of you. Conclusion After reading the above you may be thinking 'If it's swings and roundabouts, then it doesn't matter whether I buy now or later.' Yes it does matter! The point is, you don't have to rush onto the market. You can take some time to improve your finances. You can take your time to find the right property at a bargain price, whether that shows up in one year or four. You don't have to buy the first property you see at the listed price. Of course, you can't expect the market to go up smoothly at 8% every year. Sometimes it'll go up faster. But we can expect that at some points the market will slow or even reverse, as it has done over the past six months. Furthermore, that dream, bargain property that you've waited for patiently and negotiated for cleverly hasn't gone up at the average rate, has it? I believe that anyone can eventually get onto the ladder. The trick is to keep saving that deposit (even if for a while you can just afford £50pm to £100pm). Keep an eye on the market, and particularly on properties in the areas you'd like to live in. Be patient. Eventually, everything will come together: the price of the house you want, your salary, your other debts and the size of your deposit. > Compare mortgage deals. Use our full search tables and sort the results by 'True Cost Over Chosen Period' to put the cheapest deal (including fees and charges) on top of the table.