Market insight: Mind the affordability gap

First-time buyers will always be a cornerstone of the housing market, and recent years have underlined just how important they are.

From promises to boost housing supply to reforms in mortgage regulations, there has been plenty of talk - and some action - aimed at making homeownership more accessible.

Of course, these efforts are commendable, but they still only go so far. Stimulating the mortgage market can also risk exacerbating affordability challenges, pushing the goal of homeownership even further out of reach for some.

The relentless affordability challenges

Recent data suggests the pace of house price growth may be slowing, but with average values now nearing £300,000, getting onto the property ladder is still a pricey affair.

This current deceleration has been linked to uncertainty around the Autumn Budget, suggesting values could get back on the ascending path once buyers and sellers gain clarity.

Regional disparities have also fuelled the imbalance. As demand has shifted toward more affordable areas, prices in those regions have risen fastest. 

For example, while the North East has the lowest average house prices, growth in the region is the highest across England at 3.4%. A significant difference to the lowest rate of growth, 0.6%, recorded in the South West.

It’s a signal that prospective buyers must keep stretching their deposits simply to keep pace.

Compounding this, average incomes have not kept up with house prices. Although housing affordability has improved year-on-year, buyers today still face a bigger hurdle than those 20 years ago.

A crisis of supply and cost

These pressures are intensified by the UK’s enduring stock shortage, with some analysts estimating that the country needs as many as 6.5 million additional homes. Even if the government manages to meet its target of 1.5 million additional new homes over the leadership term, that still leaves the UK with a sizeable deficit.

Rising construction costs only add to the challenge. Projections suggest building expenses will increase by another 15% over the next five years. This is driven mainly by increases in labour costs – namely, changes to National Insurance contributions and the National Living Wage, which are expected to rise by 15% by 2030.

As Zoopla’s Richard Donnell notes, building homes is becoming less economically viable. If builders are deterred from increasing supply, constrained housing stock will continue to inflate prices.

The missing 3%

It’s key that lenders keep offering mortgages to those with smaller deposits, but if the goalposts keep moving, a 5% deposit today might not close the gap tomorrow.

To buy an average home priced at £298,184, a buyer would need a deposit of £14,909. Yet around a third of renters say they have between £5,000 and £15,999 in savings, while the Financial Lives Survey suggests that 21% of people have less than £1,000 saved, and one in ten have no savings at all – highlighting the disparity when it comes to the ability to save.

Even financially stable households are finding it harder to put money aside as living costs climb.

An average salary of £37,430, even stretched at six times income, gives a borrowing limit of £224,580 – still £73,000 short of the typical house price, a gap the hopeful buyer must bridge themselves.

So, what happens when a 95% loan-to-value (LTV) mortgage is no longer enough?

Going further for first-time buyers

It’s times like these that the lending sector must step forward and pioneer change.

There has been a surge of innovation across the market this year, and at Newcastle Building Society, we’ve joined the cohort of lenders offering beyond the traditional 95% LTV with the launch of our First Step product, offering up to 98% LTV.

We will accept borrowers with a minimum non-gifted deposit of £5,000 and lend up to £350,000 – a move we hope will help to resolve the deposit and affordability conundrum.

To put that into perspective, with a £5,000 deposit, a buyer purchasing a home worth £210,000 could access a loan of £205,000 at 98% LTV. With a 95% LTV, they’d need a £10,500 deposit for a £199,000 loan – a significant difference for those working hard to save.

The fee-free, five-year fixed product, includes a free standard valuation (up to £550,000), and allows penalty-free overpayments of up to 10% each year.

This initiative reflects Newcastle Building Society’s commitment to tackling affordability, but its success depends on adviser support.

Many consumers remain unaware that these alternatives exist, placing the onus on mortgage professionals to spotlight them - and to demonstrate that homeownership can still be within reach.