First time buyers and falling house prices

Are falling house prices good news for first-time buyers?

Property prices have been predicted to drop by as much as 13% but snapping up cheap properties during Covid-19, might not be so simple for first-time buyers, who could now face even higher deposit requirements. 

In this guide, we’ll explore how much a property could cost in 2020 as a result of the potential economic downturn and where first-time buyers can go for advice if they’re thinking of applying for a mortgage during Coronavirus.

Are house prices falling?

Economists are sharply divided about how much house prices will be affected by Coronavirus. Some property experts forecast a boom after record levels of enquiries over lockdown while others predict a gradual slump as employment rates fall.

While the UK property market is open, The Centre for Economics and Business Research, predicted in May that 2020 prices would be down by 13% due to a lack of transactions, uncertainty and lower incomes.

How much would a house cost me if prices fall in 2020?

The average price for a property will vary across the UK and is dependant on a whole host of factors including:

• The location

• The demand and availability of property in the area you’re buying

• The type of property you’re buying

According to the UK Housing Index, the average price for a house in the UK in 2019 was £226,798. Hypothetically, if prices were to fall by even 10%, the average price for a house in the UK could subsequently cost £204,118.20.

We can see below how the average house price in 2019 varied across the regions. As a guide, the right-hand column displays how the average house price might look if prices were to fall by 10% in 2020.

Is a fall in house prices good?

A fall in house prices could initially be perceived as great news for first-time buyers, however 

unemployment figures are predicted to rise by as much as 10%, inevitably increasing apprehension amongst lenders who are beginning to restrict the amount they will loan.

Tony Wilson, director of the Institute of Employment Studies (IES), stated in a recent interview for the BBC, that the number of claims for work benefits had risen to 1.6 million since March - a rate faster, he says, than during the Great Depression of 1929.

This is a risk for lenders who rely on their borrowers to repay their loans on time and in full. If their borrowers were to be hit with unemployment, they could end up defaulting on their mortgage. 

Therefore, in response to the economic uncertainty caused by Covid-19, some lenders have completely withdrawn their high loan to value (LTV) lending while others have tightened their affordability criteria. 

What that essentially means is that first-time buyers may need a higher deposit and proof of a stable future income.

How much deposit will I need as a first time buyer in 2020?

The table below illustrates how much a deposit could cost based on the average property prices across the UK in 2019.  Previously, a 5 - 10% deposit may have sufficed with some lenders happy to provide loans with 95% LTVs for borrowers with the right circumstances.

We can see that in the South East, a 5% deposit for the average property price could cost £15,925.

Lower property prices, higher deposits

If property prices were to fall in light of an economic downturn, they could become more affordable for first-time buyers, however restrictions on credit and lending could subsequently result in buyers being asked for deposits between 15 - 20%.

The table below indicates how much a deposit could cost in 2020 if the average property price were to fall by 10%.

We can see that in the South East, a 15% deposit for the average property could now cost £42,996.

Of course, these figures are purely used as a demonstration and no one can predict the size of your deposit without knowing your full circumstances. 

An important thing to note is that every lender will have different deposit criteria, so even if one asks for a 15% deposit, you may be able to find a more suitable lender with lower deposit requirements elsewhere.

Our brokers can take the time to listen to what you need from your mortgage and can calculate your deposit size while also offering practical advice on how to find the best deal.

Can a larger deposit be a good thing?

Most lenders offer their best rates to customers with larger deposits, so an incentive to save is that you may end up paying less for your mortgage overall.

Additionally, being able to pay for a larger percentage of the property upfront means that you own more of the property outright, also referred to as equity. 

Depending on the circumstances, owning less equity could leave you financially vulnerable because if house prices were to dramatically fall, you could fall into negative equity.

That being said, it’s also important to know that banks and lenders don’t just simply repossess homes in the event of negative equity. 

What is negative equity and is it bad?

If a property is in negative equity, it is worth less than the mortgage secured on it.

This can happen when house prices fall, perhaps as a result of economic uncertainty or a financial crash, as was the case in 2008.

When you agree to a mortgage, your lender will usually require that your property is used as security against the loan, hence why you’ll usually see a message like this on lender agreements, “YOUR HOME WILL BE REPOSSESSED IF YOU FAIL TO KEEP UP WITH YOUR MORTGAGE REPAYMENTS”

What that means is that if you, as the homeowner, defaulted on your mortgage repayments, your lender may decide to repossess the property to recover the debt.

However, if house prices were to fall since you initially bought your home, you may owe more money on your mortgage than your house is currently valued at. This could be bad news as you may still end up owing your lender money even after they have repossessed and sold the property. 

Selling a home with negative equity

Negative equity isn’t just bad for people at risk of defaulting on their mortgages. A fall in property prices could affect homeowners planning to sell too.

Say you were to take out a mortgage for a property valued at £200,000. You paid with a 5% deposit of £10,000 and borrowed £190,000 from a lender. Shortly after making the purchase, house prices fall by 10%, reducing the value of your property to £180,000. You would now owe more money to the lender than your home is worth. 

For homeowners who are happy to stay in their property and ride out the economic downturn, this may not be the worst situation. However, homeowners who find themselves in a position of having to sell their property may find themselves at a financial loss. 

Where can first-time buyers go for mortgage advice during Covid-19?

Our brokers understand that property prices are a key focus for first-time buyers eager to secure a good deal but they also understand that your mortgage can equally affect your finances, which is why they work with a range of lenders right across the UK, to find you an affordable agreement with terms that work for you. 

If you feel apprehensive about talking to a broker on the phone, that’s ok! We have advisors online who can answer your questions quickly, with the advice you need to make an informed decision. It’s free, confidential and could save you some money.