The United Kingdom is fast becoming a country divided between homeowners and tenants. The seemingly never ending trend of property price increases simply leaves many would be first time buyers even further behind in their pursuit of homeownership. With every month that passes and with every new property survey that's carried out, many people are seeing their dream of homeownership simply disappear.
The biggest problem of course is the fact that most people's income has not risen in the same way that property prices have done in the last 10 years. House prices have raced so far in front of many incomes that homeownership would seem at first glance to only be viable option to higher rate taxpayers.
In the last ten years house prices have risen by an average of around 190% across the United Kingdom. At the time of writing the average house price sits at around ?180,000 compared with an average of ?62,453 in the first quarter of 1996.
Many of the leading UK lenders are extremely anxious that first time buyers should not be cut out of the loop so have re-branded and re-designed their traditional methods of assessing affordability. The old income multiples do still exist however they have been drastically increased to accommodate the imbalance between property prices and incomes. The new buzz word within the mortgage industry is 'affordability' and there are many emerging methods of assessing affordability aside from the traditional income multiples. Instead of the lender using an income multiple to assess the level of eligible borrowing, many other factors are taken into consideration such as outgoings and future earnings prospects.
Income multiples verging on 5 are fast becoming commonplace. In October 2006, Abbey became the first major High Street lender to announce that it was offering an income multiple of 5 times salary.
Today, many first time buyers are taking larger mortgages than ever before, often relying of parental assistance or even clubbing together with friends. The shared ownership option is also an attractive proposition to many.
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.
Shared ownership has become a less viable option of homeownership over recent years - It has had little impact in the housing market with many shared ownership schemes being limited to key workers within the public sector.
For many potential buyers the first hurdle that many find so difficult to overcome is finding a substantial enough deposit to place down. There are 100% mortgages available however these can be difficult to access and can leave the borrower with negative equity.
It is becoming highly popular for many first time buyers to take out an interest only mortgage in order to achieve a lower monthly repayment. Combining high levels of borrowing with an interest only mortgage is widely regarded as a false economy - The entire capital remains outstanding at the end of the mortgage term. Interest only mortgages have increased in popularity over recent years. Today the percentage of all mortgages taken out on an interest only basis stands at 16% however as recent as 3 years ago the figure stood at 6%. There is no question that interest only mortgages have there place in the market however they should only be viewed upon as a short term method of achieving a lower monthly repayment - unless a repayment vehicle has been arranged to run alongside it.
James Copper writes about the financial industry. You should look at his content if you want to learn more about commercial finance.
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