Why first-time buyers need more than new-builds and high LTVs

But new-builds are not necessarily cheaper than pre-owned properties. The average price of a new-build was £388,789 in January, up 17 per cent year on year, according to the government's UK house price index.

In comparison, the average price of an existing resold property was £276,194, down 1.8 per cent year on year.

Indeed, the Office for National Statistics found newly built dwellings were, on average, less affordable than existing properties across England and Wales in 2023.

Using a threshold of five years of income as a broad indicator of affordability, only existing dwellings in the North East cost less than five times earnings last year, according to the ONS.

It also found that full-time employees in England could expect to spend around 8.3 times their annual earnings buying a home.

In February, the then government was reportedly looking to introduce a 99 per cent LTV mortgage scheme as part of the Spring Budget.

But with loan-to-income ratios usually capped at 4.49 times income, even a rare 100 per cent LTV mortgage would not be an applicable solution for many aspiring first-time buyers.

“The government was talking about 99 per cent LTV mortgages, which didn't ultimately come to anything,” says Yorkshire Building Society’s director of mortgages, Ben Merritt. “So we stepped in with a solution, but we're not going to be able to service the whole market on our own.

“What we've called for is two things. One is cross collaboration across new-build houses, lenders, regulators and consumer groups to try and work out what are the right options, and what are the downstream impacts of certain schemes.

“And then we want a variation of a Help to Buy scheme that isn't specifically new-build, which would include second-hand homes as well and that helps first-time buyers with that deposit; so some kind of government support to help them to buy a new-build or second home."

Supply and demand

He explains the problem the UK had with Help to Buy was that a lot of government incentive was concentrated into quite a small market, because with new-builds the market was only seeing approximately 200,000 homes a year.

But Merritt says if there was government support across the entire industry, Britons would then have access to a much greater supply.

He explains: "The impact on house prices would be less severe than what we saw with Help to Buy, which inflated prices, as we know, and that was because you had a small amount of supply and a huge amount of demand.”

“Everyone's got their views on Help to Buy, but it certainly did improve access for first-time buyers on both a deposit and affordability perspective,” says Nationwide’s director of home, Henry Jordan.

An important component of the scheme, he adds, was that it was outside the LTI flow limit, which restricts the number of mortgages extended at LTI ratios of 4.5 or more to 15 per cent of a lender’s new residential mortgage lending.

Buyers could not use Help to Buy if they required a main mortgage of more than 4.5 times their household income.

“The lender lent up to 4.5 times, and then the government provided the equity loan. It's very hard for that to be filled by lenders, given that scheme’s ended,” says Jordan.

Kate Davies, executive director of the Intermediary Mortgage Lenders Association, agrees that Help to Buy was probably not “everybody’s favourite”.

“But it did actually get spades in the ground. It did get stuff built,” she adds. “There's no central government replacement for that.

“If you've got an independent scheme that tries to replace Help to Buy – and the obvious one that comes to mind is Deposit Unlock -– it's got to appeal to all the lenders to have the same sort of traction as Help to Buy."

Davies adds: "It's got to be understood by them all. It's got to be as applicable in Penzance as it is in Northumberland.”

The mortgage guarantee scheme Deposit Unlock launched in 2021, enabling borrowers to purchase a new-build home with a 5 per cent deposit. Lenders that currently offer mortgages under the scheme are Accord Mortgages, Bluestone Mortgages, Nationwide and Perenna.

Mortgage guarantee scheme

Speaking about the idea of a government reintroducing a help-to-buy scheme, Davies adds: “If there is appetite for it, or it does look as if someone's going to do something, that makes it difficult for the people who have been working for ages on trying to think up an alternative, private-sector scheme.

"It's a bit of a catch-22.”

Besides suggesting improving the supply of new homes, a report for the Building Societies Association, published in April, recommends a review of the LTI flow limit to focus on first-time-buyer support.

The BSA’s report says that while the 15 per cent cap on lending above 4.5 times income may be less relevant today given higher mortgage rates, an immediate review should be undertaken to assess whether it would be beneficial to adjust the limit and to target mortgages above the cap at first-time buyers.

“At the moment, the binding constraint isn’t the LTI flow limit,” concurs Merritt at Yorkshire Building Society.

“I can’t speak for everyone; but for us, because we're having to apply the [Financial Conduct Authority's Mortgages and Home Finance: Conduct of Business Sourcebook] stress rule and effectively stress above the reversionary rate, customers are hitting their maximum affordability through the affordability model before they hit the LTI cap.

“When interest rates were lower, the LTI cap was a constraint and the affordability stress rate wasn't. So some of this is dependent on where you are in the economic cycle.

“As interest rates start to fall over the medium to long term, the LTI control will start to become a binding constraint again.”

Chloe Cheung is a senior features writer at FT Adviser