With the average deposit as much as £42,361, many first-time buyers are choosing 30-year mortgages to boost affordability.

Nearly half of first-time buyers are opting for mortgage terms of more than 30 years, according to the latest figures.

The numbers buying their first home last year were down slightly to 727,000 compared with 785,000 in 2017/18, according to the government’s English Housing Survey.

Of these, 45% of first-time buyers in 2018/19 opted for a mortgage term of 30 years or more, longer than the standard term of 25 years

Ten years ago the number of first-time buyers with mortgages of more than 30 years stood at just 33%.

This trend towards longer mortgage terms can be seen more broadly, with the proportion of homebuyers generally taking out a mortgage with a term of more than 30 years increasing by nearly 50% in the past decade.

Why are mortgage terms increasing?

The house price-to-earnings ratio has increased significantly in recent years, making it harder for people to take their first step onto the property ladder.

Despite first-time buyers putting down an average deposit of £42,361, for just over two-thirds of people their down payment was less than 20% of the purchase price of their home.

Higher house prices mean first-time buyers need a larger deposit which is more challenging to save, and also results in larger monthly mortgage repayments.

One way to reduce the level of monthly repayments is to opt for a longer mortgage term.

For example, the payments on a £200,000 mortgage at 2.5% over 25 years would be £905 a month, but falls to £720 per month if the term is extended to 35 years. 

What is the broader impact?

The survey suggested that the high cost of buying a home is deterring some people from getting onto the property ladder.

Only 56% of people living in private rented accommodation said they expected to buy a property in the future, compared with 61% when the same survey was carried out in 2013/14.

Among those private renters who do expect to buy a home, 41% thought it would be five or more years before they were able to get on to the property ladder, although 27% expected to be able to buy their own place within two years.

What’s the background?

While the latest survey highlights that first-time buyers are facing challenges in getting on to the housing ladder, the proportion of young people who are homeowners has increased in the past five years. 

Around 41% of people aged between 25 and 34 owned their own property in 2018/19, compared with 36% in 2013/14.

The overall proportion of homeowners has remained broadly stable during the same period.

One reason for the increase is likely to be the government help that has been put in place to enable people to get on to the property ladder.

The Help to Buy scheme enables people to purchase a property with just a 5% deposit, with the government topping this up with a 20% equity loan that is interest-free for the first five years. 

Other initiatives include the Lifetime ISA, under which the government tops up savings towards a housing deposit with a bonus of up to £3,000.

First-time buyers have also benefited from a stamp duty exemption on homes costing up to £300,000, although the Chancellor recently announced a stamp duty holiday for all buyers on homes costing up to £500,000 until 31 March 2021.

Top three takeaways

  • First-time buyers are opting for longer mortgage terms as they face affordability challenges getting on to the housing ladder

  • Around 45% of first-time buyers opted for a mortgage term of 30 years or more, compared with a standard term of 25 years, up from 33% a decade earlier

  • First-time buyers put down an average deposit of £42,361, although for just over two-thirds of people this was less than 20% of the purchase price of their home.

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