First-time buyers take out longer mortgage terms

The number of mortgage searches done on behalf of first-time buyers jumped by more than a fifth during February and March.

The uplift suggests first-time buyers are taking advantage of the slowdown in activity in the housing market to step on to the property ladder.

However, following steep house price rises during the pandemic, first-time buyers are employing a range of strategies to own a home.

First-time buyers taking out longer mortgage terms

The number of first-time buyers opting for longer mortgage terms is continuing to increase, according to data from trade body UK Finance.

Nearly four out of 10 first-time buyers are taking out a mortgage over 30 to 35 years, while 17% choose a term that is even longer.

Repaying a mortgage over a longer period can significantly reduce monthly repayments, making the loan more affordable.

For example, if you borrowed £200,000 over 25 years with an interest rate of 4%, your monthly mortgage payments would be £1,056.

If the mortgage term was extended to 35 years, the monthly repayments would be £886, while with a 40-year term they would fall to £836.

However, there is a downside to this strategy, as it means you end up paying significantly more interest on your mortgage.

Interest payments on the example above would total £116,702 if the mortgage was repaid over 25 years, but would soar to £201,221 if it was repaid over 40 years.

First-time buyers look to purchase smaller homes

Another trend that has emerged in recent months is for first-time buyers to settle for smaller properties.

Higher mortgage rates mean people’s buying power has fallen by 20% in the past year.

As a result, the majority of first-time buyers are now purchasing one and two-bedroom homes for the first time since 2010, according to estate agents Hamptons.

With rents increasing and competition for rental homes intensifying, many first-time buyers have decided they would rather choose to live in a smaller property that they own.

Saving less for a deposit

One of the biggest hurdles first-time buyers face is saving for a deposit, with people taking their first step on the property ladder putting down an average of £62,500, according to Halifax.

The good news is that the number of mortgages that require low deposits has increased in recent months.

There are now 204 mortgages for people with only a 5% deposit, up from just five in March 2021 and 132 in October last year, and 684 for those who have 10% to put down, compared with 295 six months ago.

The government’s Mortgage Guarantee Scheme, under which first-time buyers and home-movers can purchase a property with just a 5% deposit, has also been extended to run until the end of this year.

Government schemes for first-time buyers

There are also a raft of government schemes first-time buyers can use to help step onto the property ladder.

• Shared Ownership enables people to buy a share in a property and pay rent on the rest.

• First Homes enables local first-time buyers and key workers to purchase a home at a 30% discount to its market price.

• The Lifetime ISA enables first-time buyers to save up £4,000 a year and the government then adds a 25% bonus – up to a maximum of £1,000 annually. The money must be used to either purchase a first home or for retirement.

House builders are also offering their own schemes, such as Fairview New Homes’ Save to Buy initiative.

The scheme enables first-time buyers to move into their home and pay ‘rent’ at a fixed cost for between six months and two years.

This money is then set aside until they have a big enough deposit to qualify for a mortgage on the property.