Why are First Time Buyers Opting for Longer Mortgage Terms?
The latest figures from the UK show that nearly half of new property owners choose mortgage terms that last 30 years.
According to the English Housing Survey, 727,000 houses were sold last year. Among these buyers, 45% of first-time property owners opted for mortgage terms that last 30 years which is slightly more than the standard 25-year term. Only ten years earlier, 33% of first-time buyers opted for the longer mortgage term.
Furthermore, we can see this trend appears on a wider scale if we consider the practices of first-time buyers in the past decade. These figures show that the number of 30-year mortgage terms rose to 50%.
Why is This Trend Appearing?
This trend is motivated by the increase in the house price-to-earnings ratio. That is, people are finding it harder to earn enough money to begin climbing up the house ownership ladder.
The average deposit first-time buyers have to pay is £42.361. The height of the deposit is a reflection of the general increase in housing prices. These factors make it difficult for first-time buyers to save enough money to make the deposit payment. Not to mention the high mortgage rates that come after.
In light of these facts, it makes sense that new property owners want a longer mortgage term because they cut down on the height of monthly payments. For instance, mortgage for £200,000 at 2.5% would be £905 in a 25-year term. However, if you extend the payment term by five years the monthly payment comes down to £720. Such a cut every month can be beneficial for the entire household and this is why people choose longer mortgage terms.
How will Longer Mortgage Terms Influence the Housing Market?
Because of the high housing prices, people are choosing to opt-out of buying a home and instead pay rent. Recent estimates state that only 56% of people living in rented accommodation claim that they are considering buying their property. When the same survey was carried out in 2013/14 61% of people in rented accommodation said they are considering purchasing their property.
Even though the surveys show that fewer people are considering buying their property there are other more positive trends in the mortgage market. For instance, a lot of young people own their property. It is estimated that 41% of people between the age of 25 and 34 own their property. Back in 2013/14, it was only 36%.
The reason why so many young people are opting to get on the property ladder is probably linked with government aid. Thanks to the Help to Buy scheme young buyers can purchase their first property with a 5% deposit. The other scheme that helps in rising this number is the Lifetime ISA because it tops up your deposit savings with a bonus that can go up to £3,000. Lastly, all first-time property buyers do not have to pay stamp duty if the property they are buying is up to £300,000. Also, the Chancellor announced recently a stamp duty holiday for all property purchases that are up to £500,000 regardless of your homeownership status. This offer will last until 31 March 2021.
Even though the total numbers of homeowners are at a constant it is safe to observe the changing trends. If the prices on the housing market continue to increase and fewer people become homeowners, we can also expect less development in the housing sector. Therefore, the government should step in and regulate the housing market with help like the mentioned schemes.