Are First Time Buyers Really Unable to Get Mortgages… and Another Word About Lease Options

“First time buyers cannot get onto the housing ladder. They are priced out of lots of areas where they would like to live”.

You hear this kind of thing quite a lot: Young first time buyers are priced out because they are not earning enough or because they cannot raise the necessary deposit to get a mortgage.

But is it really true?

A quick glance online shows me that the Funding for Lending Scheme is actually working rather well and lots of mortgages for first time buyers are available at up to 90% Loan to Value (i.e. just a 10 per cent deposit). One mortgage, from the Co-Op has no application fee at all and an interest rate under 4%.

Private landlords can only dream of these kinds of rates, these days.

Ten percent does not seem too much of a deposit burden. But of course, the multiples of income available for the mortgage will depend on someone’s gross income and their other commitments, and these often mean that borrowers are indeed priced out of many areas that they would like to live in.

Notice, I said “would like to live in”. Now, I don’t have much sympathy when young first time buyers insist that whilst they are busy saving up for a deposit, they will rent in somewhere leafy and central (no wonder they cannot save anything). Then, they insist they will only buy a house or flat in a place that is equally leafy and central. (My big dream five bedroom house in Blackheath is still financially out of reach and I no longer have much hair left on my old head).

I guess, what I’m saying here, is that perhaps there are some first time buyers who don’t really want to make any short term sacrifices to get what they want in the longer term. Not like in my day, with the cold showers, no central heating and the outside loo!

Alternative View – Holding On for House Price Falls

There is other research we have seen which says first time buyers are not really constrained that much by mortgages – that this whole mortgage argument is a myth.

This research suggests first time buyers are holding off buying property because they think that property will be cheaper in a year or twos time.

This is a very interesting argument and a very different point of view. (First time buyers may be right to hold off in some locales where the recession is biting hard and the bottom for house prices looks some way off. However, I’m not so sure this is a sound strategy in places like most of London where house prices seem to be holding firm or still rising).

Lease Options

Some property lease option investors we know are convinced, however, that it is a lack of mortgages that is driving their particular niche business.

They tell me that because lots of people (self employed, first time buyers and others) cannot get the mortgages they need for the houses they want to buy, they therefore turn to people like them, who can set up property lease options in which the punters can move right now into the place they want to live in (their dream house), and which they will hopefully own when they have completed their side of the lease option bargain.

Of course, under a lease option the punter has to pay a premium (always more than a mortgage or rent, naturally!) to be able to keep the option open so they can later exercise it and buy the property outright from the lease option holder.

I’m still not convinced by property lease options are the best course of action for someone who is in this position. They would surely be better served by saving harder and paying less rent in a less attractive (non leafy!) area, in order to save the cash they need to get a mortgage rather than going for a lease option.

And I’m not convinced either that investors really appreciate the risks, hassles and potential acrimony that can come their way if they get involved in writing property lease options with these desperate first time buyers who feel they are (for whatever reason) frozen out of home purchasing via the more traditional mortgage route. But that is an issue we will look at in another blog post.

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