The changing landscape of mortgage costs: Has getting a mortgage become more expensive?

Buying a home has always been a life milestone, and something that in the UK most people aspire to. Each generation faces its own difficulties in getting their foot on the ladder, but for those who bought some time ago, it may feel that today’s generation don’t face the same hurdles as they did. But is this true?

In this article, we’ll delve into the numbers to see if it actually is more expensive to buy a home today than in the past. 

Understanding mortgage costs

There are three main components of a mortgage which impact how hard it is to get on the ladder: the loan size itself, your deposit size, and the interest rate you pay. Let’s look at these separately.

Mortgage size

The average property in the UK now costs £290,000, 9 times the average salary.

That’s 66 times more expensive than the start of the ‘70s, when the average house was £4,378, 2.6 times the average salary . Even compared to 2004, the average house today is still almost twice as expensive.

Obviously, prices do go up over time, but over the last few decades, property prices have outpaced wages. Over the last year, when you take inflation into account earnings have only increased by 1.2%.

This means that those who already own property have seen their wealth increase, while those wanting to get on the ladder are now having to overcome a growing gap between earnings and what a house costs.

One of the main limiting factors is what lenders will let you borrow for a mortgage. Typically, a lender will let you borrow between 4 to 4.5 times your income for a home loan, but with properties costing 9.1 times the average income, this leaves many potential buyers falling short.

Saving up a deposit

Because of rising property prices, buyers also have to overcome the hurdle of saving up a house deposit. 

If a buyer wanted to buy the average home, for a 10% deposit they would need to save up £29,000 - almost one year’s worth of earnings! With rent taking up 28% of earnings and rising 10% annually, it’s no wonder saving up a deposit takes 8 years on average. In comparison, for buyers in the 1970s, a 10% house deposit to buy the average home would be £438, just over 3 months’ worth of earnings.

This is where family support can be so fundamental in helping more buyers purchase their first home. There are various ways a family member can support a loved one’s home purchase. From letting them live at home so they can save up quicker, to becoming a guarantor on their mortgage by adding their income to boost what their loved one can borrow.

If you have cash savings, you could also gift money to your loved one to boost their house deposit, or use a Savings as Security mortgage to help them get on the ladder sooner, then get your savings back after a few years. If you own your own home, you can also use a Deposit Boost to unlock money from your property through a small mortgage, which can be used to boost their house fund. With a larger deposit, your loved ones could access lower interest rates, making their monthly repayments more affordable.

Read more: How can parents help the next generation buy a home?

You might also be interested in: Should I gift my family inheritance early?

Interest rates

For those who can remember the 17% interest rate apex of 1979, the new homeowners and prospective buyers of today moaning about 6% rates may seem over-dramatic.

But the one thing to remember is interest rates are calculated as a percentage of your overall mortgage loan. With the size of mortgage loans being greater, this means even a small percentage increase for today’s buyers can make homeownership impossible.

Let’s look at an example. 

In 1979, the average property in the UK cost £13,650. With a 10% deposit of £1,365, that would mean at a 17% interest rate the monthly mortgage repayments would be £177 . This would be 45% out of the average monthly earnings for one man, or 28% of the average monthly earnings of a couple. 

Today, with the average property costing £290,000, a 10% deposit and a 6% interest rate, the monthly repayments would be £1,682.

That’s 68% out of the average monthly earnings of one person before tax. With two people’s earnings it’s 34%, but of course that doesn’t take into account costs like childcare fees which would impact how much someone could borrow and their disposable income.

As you can see, based on these numbers today's mortgage rates are making mortgages more expensive to borrowers than the 17% interest rate high of the late ‘70s - a fact which may surprise many people!

Other factors

Young adults today have also had to cope with a lot of financial insecurity. While student loans and childhood care costs are expenses which previous generations may not have had to contend with, the last few years have also hit the younger generation the hardest.

The COVID pandemic increased demand for larger homes and properties in more suburban and rural areas. This led to house price appreciation, benefiting those who currently own these properties who tend to be older.

Following the high levels of unemployment and low wage growth after the 2008 financial crisis, COVID-19 then disproportionately impacted younger generations. The FCA reported that those aged 18-34 years-old and the self-employed saw the largest proportional increases in financial vulnerability in 2020, rising by more than 40%.

Another factor is stricter affordability testing. Since the 2008 financial crash, lenders have tightened their affordability rules to ensure they are not lending to high-risk borrowers. While this helps to promote fairer and less risky borrowing, it does mean that being approved for a mortgage has become harder. Applicants need to provide evidence of spending, including what they spend each month on childcare, car repayments and even their gym membership. Those on maternity leave, who are self-employed or have multiple income streams may also find it harder to be approved, too.

Hope on the horizon

Although the picture for today’s first time buyers can seem bleak, there is a silver lining. Not only are there more options for families to support the next generation into homeownership, there is also a lot of innovation in the mortgage space.

From shared ownership to buying with friends, there are myriad ways into homeownership - the difficulty is both buyers being aware of what options exist and mortgage advisors keeping up to date with the latest solutions.

Through Saga Mortgages, provided by Tembo, you and your loved ones can have access to award-winning mortgage advice. So whether you’re interested in exploring family supported mortgages, or your loved one needs help overcoming the affordability gap, get started today.