23rd September 2021
Launched in June 2021, the government’s First Homes scheme joins a list of other incentives designed to help first-time buyers onto the property ladder.
The scheme, which runs in England alongside existing shared ownership, right to buy and Help to Buy initiatives as well as new government-backed 95% mortgages, has been created to give access to new-build properties to first-time buyers at a discounted price.
It’s hoped that this option will allow those struggling to afford a property in their local area to be able to make a purchase without being forced out of a specific location as a result of cost.
As coronavirus restrictions begin to lift and the UK returns to some normality, we have taken a look at what first-time buyer affordability looks like across England in June 2021 and how the launch of First Homes could assist with this.
Property prices are now at an all time high. As of June 2021, it’s estimated that house prices are up 10.2% compared to the previous year - driven by the impact of the coronavirus pandemic, the recent Stamp Duty holiday, as well as a shortage of housing pushing costs up even further. This is the fastest annual rate of growth in 14 years and for many first-time buyers is making the challenge of getting on the ladder more difficult than ever before.
Couple this rise in prices with property searches across the board at a ten year high and you have an extremely buoyant property market. However, it’s clear that support is needed for those looking to reach the first rung on the property ladder.
While the government has been launching new incentives such as the Stamp Duty holiday to kickstart the property market and drive house prices, they have also continued to invest in new options for young people, those living in council housing and first-time buyers.
Some of the current initiatives include:
These options are still available and each of these should be considered to establish which best suit your personal circumstances.
The First Homes scheme has been designed specifically to help local first-time buyers and key workers onto the property ladder that might otherwise have had to move to another town or city in order to ever afford their first home.
To do this, First Homes properties will be priced at a discount of at least 30% of the original market value to allow more affordable deposits and mortgages. It’s worth noting this discount could be greater - this is down to the discretion of your local authority.
It’s anticipated the scheme could save the average buyer £70,000 though we have taken a deeper look into this further down in this article. The main catch of this scheme is that these discounts will apply to these specific homes forever, meaning that the reduced costs can continue to benefit new generations of first-time buyers each time the property is sold.
For example, a £200,000 property could be sold at £140,000 in June 2021. If the market value of this rises to £250,000 by June 2025 the 30% reduction still applies meaning the sale price would be £175,000.
Compared to other existing initiatives designed to get first-time buyers onto the property ladder, there are slightly more criteria that buyers must fall under to be eligible for First Homes.
In order to get an understanding of where the First Homes scheme could have the greatest potential impact, we wanted to get an understanding of how affordable it is to buy a first home in different areas of England ahead of the scheme launching in June 2021.
To do this, we looked at various factors affecting property purchase affordability including average house price, average annual salary and monthly take home pay based on a couple to work out where in England was most and least affordable. Using these figures, we were also able to work out how long it would likely take to save for a deposit in each area.
We also took a look at how the First Home scheme could potentially impact all of the above; reducing deposit amounts, monthly mortgage payments and more.
When taking into account the average monthly mortgage payment as a percentage of income, it was Oxford that was the least affordable location in England for first-time buyers.
With an average property price of £540,005 and an average annual salary of £31,232, the average mortgage on a property in Oxford would equate to 49.37% (£2,049 out of £4,150) of a couple’s combined take home salary - the highest percentage for the entirety of England.
Following closest behind was Bath (47.65%) and London (47.12%) though affordability does vary across the capital (we’ll get into this later…). The ten least affordable areas were as follows:
In contrast, when looking at the lowest percentage of monthly income that mortgage repayments were liable for, it was Bradford that was most affordable for first-time buyers.
With an average property price of £145,981 and an average annual salary of £28,790, this equated to 14.30% in terms of monthly mortgage payments as a percentage of income - the lowest in England.
Blackpool (15.94%) and Stoke-on-Trent (17.35%) followed close behind with the top ten most affordable areas for first-time buyers as follows:
Not surprisingly, there continues to be a bit of a North-South divide when it comes to affordability with locations in the north of England being typically more affordable than those in London and the south - this despite the shift in monthly salary and income.
While the price cap for London properties (£420,000) is still significantly higher compared to the rest of England the First Homes Scheme could still provide Londoners with a significant saving when compared to typical property prices across the capital. However, it's clear that prices do vary depending on location and proximity to zone one.
While the average property price for Greater London is £672,051, there is significant variance across its 32 boroughs highlighting the affordability divide across the capital. Barking and Dagenham has the cheapest properties on average (£311,304) whereas the cost of properties in Westminster (£1,093,564) and Camden (£1,090,817) could fetch more than one million pounds.
When property prices were compared to the average salary data for each borough, the most affordable location for first-time buyers was Bexley with mortgage payments making up 29.82% of the average salary. Barking and Dagenham (30.27%) and Newham (31.68%) completed the top three most affordable areas in Greater London for first-time buyers.
The full results for all 32 London boroughs as well as the London average are as follows:
Despite having some of the highest average take home salaries in the capital, the boroughs of Camden (64.14%), Hammersmith and Fulham (56.18%) and Westminster (54.49%) were the least affordable locations for first-time buyers in 2021.
The scheme could make a significant difference to a first-time buyer's monthly outgoings once on the property ladder in terms of mortgage payments as well saving for that all important deposit (we’ll go into more detail on this shortly…)
Regardless of location, the scheme will save first-time buyers hundreds of pounds per month on mortgage repayments which can go towards other living expenses or even furnishing the property in the first place - one of the biggest costs when buying a first home.
For example, for those in London that purchase a property under the scheme, they can expect to pay on average around £766 less a month on their mortgage repayments, taking their percentage spend of income from 42.17% to 32.97% - a significant saving!
Of course, the big question on most first-time buyers' lips will be around how this scheme affects deposits and this varies depending on what percentage of deposit you are looking to put down on your first property. The higher you are able to go the better the interest rate is likely to be on your overall mortgage and repayments.
We have pulled together what the average cost of a 5%, 10%, 15% and 20% for each English town and city as well as the London boroughs featured in this research and how this changes once the First Homes scheme discount has been applied.
Regardless of location and deposit level, the 30% price reduction presents significant savings for deposits which in turn significantly improves affordability for first-time buyers both before they have purchased a property and once mortgage payments begin. This also means they should be able to save for a deposit faster in the first place meaning for renters they can be investing funds into their own property more quickly.
The average savings are even greater when you look at the figures across the capital where the average 10% deposit would usually cost around £67,205. With the 30% discount, this reduces to £47,044 - more than £20,000 in savings. We’ve also taken a look at how these changes could affect the time needed to save for these deposits further down in the article.
With lower deposits required following the First Homes scheme price reduction, the time taken to accrue the funds required for a deposit will also decrease meaning first-time buyers could potentially take their first step on the ladder quicker than previously.
To establish how much time this could save when saving for a deposit, we’ve calculated how long it will likely take in months to save for a 5%, 10%, 15% and 20% deposit both before and after a 30% price reduction. This is based on the assumption that 20% of income will go towards deposit savings so just bear in mind this will reduce if you are able to save more each month, and vice versa.
Once again, it’s clear that regardless of location or deposit level that the First Homes scheme could reduce the time to save for a deposit quite significantly. Those in Bradford looking to save for a 5% deposit for example can expect to save three months of time, while for those in London looking to save for a 10% deposit it could be cut by 19 months - more than a year and a half of time that could be invested into a property as opposed to renting.
However, while the minimum discount available as part of this scheme is 30% it’s clear that some local authorities are likely to have to stretch a little further in order to meet the price caps imposed by the conditions of the scheme (a maximum of £250,000 and £420,000 in Greater London). For example, in Oxford, roughly a 54% reduction will be needed in order for First Home properties to be priced under £250,000.
This is also the case for other local authorities across England including Bath, Cambridge, Reading and more:
Despite the price cap in Greater London being significantly higher at £420,000 it’s also clear that a number of London boroughs will need to be generous in their price reductions with Westminster, Camden and Hammersmith and Fulham requiring the greatest average discounts.
As of September 2021, there are four developments across England currently being built which look set to contain First Homes properties, with more set to be announced in the coming months as we head into 2022. These locations include:
While the First Homes scheme will no doubt help more first-time buyers onto the property ladder and improve affordability as a whole, it’s important to remember that a mortgage is likely to be the biggest financial commitment of a lifetime so it’s crucial to understand how the figures above apply to daily life.
It’s also important to remember the long term implications of purchasing a First Homes scheme property - particularly considering the price reduction which remains throughout the lifetime of the property.
We spoke to some personal finance and mortgage experts to discuss how much of your monthly budget should be dedicated to mortgage repayments:
Nisha Vaidya, mortgage expert at money.co.uk said:
“A home is one of the largest purchases you’ll make and it can be difficult to understand how much you can afford. There are many factors, like your salary, regular outgoings, and debt-to-income ratio that will impact whether a home is within your reach. Along with interest, taxes and insurance, you should also be aware of the additional costs associated with homeownership, such as maintenance and utility bills, all of which should be taken into consideration when working out whether you can afford a mortgage.
“A good rule of thumb is to allocate no more than 35% of your gross income to your monthly mortgage repayments. Any more than this and you could become 'house poor', where you own a house, but lack the funds to do other important things such as saving money or going on holiday.”
Kia Commodore, personal finance expert and founder of financial literacy platform Pennies To Pounds, adds:
“The pandemic has caused house prices to be on the rise. The amount of money you should look to set aside for mortgage payments as a percentage of your income varies for different people as it can depend on many other factors. However, it's best to ideally keep that percentage to 35% or less of your income.
“It's important to work out how much of your income will have to be dedicated to mortgage repayments ahead of applying for a mortgage or remortgage. This will ensure that you're able to afford payments comfortably and won't have to overextend yourself financially.”
Cassie Stephenson, director of mortgages at Mojo Mortgages, said:
“While of course it’s important to remember the 30%+ discount will apply throughout the lifetime of the property and will apply when you eventually sell for the first time, a First Homes scheme property is still very much worth considering as an option for first-time buyers looking to get onto the property ladder.
“The savings available - particularly allowing first-time buyers access to higher LTV mortgages through reduced deposits - could also mean better access to lower interest rates and improved overall savings across the lifetime of a mortgage. Plus of course, purchasing a home is a significant long term investment towards your financial future as opposed to lining a landlord’s pocket.
“We’re excited to see how this new scheme develops over the coming months as new properties and developments continue to crop up across England.”
Average monthly salaries by location were taken from Haysto’s Council Tax calculator: https://www.haysto.com/which-parts-of-gb-have-the-worst-deal-on-their-council-tax
Monthly take home figures were calculated using The Salary Calculator: https://www.thesalarycalculator.co.uk/
Mortgage calculation figures were taken using the Money Advice Services mortgage calculator: https://www.moneyadviceservice.org.uk/en/tools/mortgage-calculator
Average property prices for each location were taken from Zoopla on 7 June 2021: https://www.zoopla.co.uk/house-prices/
Here are a few other articles you may find useful.
Compare remortgage deals online and see exactly how much you can save You'll also see if you'll need to pay any early repayment charges.
Need to speak to a mortgage expert today? No need to go to a branch, simply book a call at atime that suits you. It's all FREE.