According to a newly done study by the Nationwide Building Society; in the past year, nearly 70% of first-time buyers took out a mortgage beyond the traditional term of 25 years. This starkly compares to how less than a decade ago, that rate was less than 50%. There was a 45% rise in first-time buyers taking out an initial term of more than 25 years.
The longer the mortgage period, the higher the overall costs will be, even with a lower interest rate. The total significant costs for the mortgage can lead to the consumer paying for more than expected. It is calculated that taking a mortgage plan from 25 years to 35 years can have an increase in the total payment of the mortgage by nearly 40%.
While the market house prices continue to rise, the earnings of these first-time buyers have changed little. This creates a significant barrier for first-time buyers to make a deposit. A study shows that having a 20% home deposit nowadays is equal to 104% of the pre-tax income of an average full-time worker. This is up nearly 87% from just 10 years ago.
After looking at the cost of house prices relative to the average annual earnings, Mr. Harvey of the Nationwide Building Society has commented that during 2020, the “first-time buyer house price-to-earnings ratio stood at 5.2, close to 2007’s record high of 5.4, and well above the long-run average of 3.7”. This trend has been shown in recent years and is expected to continue growing. The price-to-earnings ratio is said to be predicted to reach nearly 6.0 by the end of 2023.
In addition, there has also been a significant concern in the widening of the gap between the least affordable and most affordable housing areas. The research has also found that housing affordability is particularly challenging for people working in more technical jobs. These include careers in construction work and manufacturing or people who work as cleaners, in leisure, personal service jobs, and couriers. Many of these people can see that nearly 50% of the take-home pay after taxes goes towards these mortgage payments.
The heavy toll that mortgage payments take from these people’s financials eventually can lead to less money put into savings. This could possibly lead to less preparation for retirement and far less financial freedom and stability.
The continued rise of house prices within Europe could spell trouble for families that lie within the lower-middle class, as well as younger individuals looking to buy for the first time and settle down.