Can Young People Afford Housing?

Towards the end of the 20th century, home ownership in the United Kingdom reached record levels. Margaret Thatcher spent eleven years trying to build a property-owning democracy. One of her successors, David Cameron described ownership as the ‘Conservative Dream’.

Today, what was once deemed as a fair reward for aspiration is becoming increasingly unachievable – according to the statistics, at least. Young people have been hit the hardest. 65% of 25-34-year-olds owned their own home in 1991 compared to around 30% today. These figures make for grim reading, but does that mean young people should give up on the ideal of home ownership?

Absolutely not.

 

With a bit of forward planning, a zest for saving, and awareness of the market, young people can still set themselves on the road to ownership.  

 

Before explaining how young people should save for their first home, it’s important to understand what hinders young buyers in the first place. There is a common misconception that having a large student loan would deter providers from offering you a mortgage – that’s not strictly true. Student loans don’t appear on your credit files so they won’t be seen in the same way as other types of loan. Whilst a student loan won’t stop you from obtaining a mortgage in itself, it can impact upon the affordability checks carried out by lenders. If your student loan is eating into your take home pay too much each month, then the lender won’t have faith that you can keep up with repayments. In most cases, completing your degree will improve earnings potential anyway which should avoid this issue.

Rather than repaying student loans, it is saving for a deposit that has proven to be a stumbling block for most first time buyers – especially in the south of England where house prices are much higher.

 

How much do I need to save for a house deposit?

Here in Gateshead, the average deposit saved by first-time buyers is £21,000; that equates to a 16% deposit on the average house price of £127,000. Keep in mind that Gateshead is one of the cheapest areas in the country to buy a home – a similar 16% deposit in Bedfordshire might mean paying almost double the Gateshead figure.

 

How much should I save? How long for?

Again, that depends on where you intend to purchase your property. It’s best to take a long term view, but small savings can make a big difference. If you have the patience to watch a fund grow, saving into a Lifetime ISA (or a Help to Buy ISA) is your best bet, as the government will award you £1 for every £4 you save, up to a maximum of £1000 per year. Your age also affects your decision; if you are 18 now then you could take a long term view of your savings (say, ten years), and still be younger than the average first-time buyer by the time your savings have matured.

Here are a few examples of how far a modest amount can go when held in a Stocks and Shares Lifetime ISA:

 

Or, you could choose to wait until you have a regular income through a stable job and invest larger sums of money each year for a faster return towards a house deposit:

 

A Lifetime ISA (Read more here) is available as stocks and shares (your money is invested) or as cash. Due to low-interest rates, funds held in cash are unlikely to keep up with inflation. However, it should be noted that investments can go up as well as down so you may make a loss. It’s a question of risk versus reward.

 

What about mortgages – surely I will need a bigger deposit than that?

Larger deposits correlate to better mortgage rates (lower interest repayments), but it can be difficult to scrape together a sizeable deposit. Five and ten percent deposit mortgages are becoming increasingly common; opening up the housing ladder for more young professionals. Applicants with good credit scores are typically eligible for favourable interest rates, so it makes sense to start using a credit card as soon as you can. There’s also the question of fixed and variable mortgages. Fixed mortgages mean the interest rate you pay is fixed for a certain length of time, whilst variable mortgages are where the lender can set interest rates at their own discretion.

You have to make a concerted effort to be in a position to purchase a home. Buying your first home won’t be particularly easy or instantaneous; you won’t just wake up one morning and find yourself exchanging property contracts on a whim. But – and this is worth remembering – it’s not as hard as you might think!