IFS - Around half of first-time buyers in their 20s receive financial help to buy their home, with large consequences fo

From: Think Tanks
Published: Mon Dec 11 2023

We examine the patterns of financial help for first-time home buyers.

Those getting financial help receive an average of 25,000, making up almost half of their deposit. These wealth transfers help many of those who receive them to purchase a home sooner, while also enabling some buyers to put down a larger deposit as a proportion of the house price, substantially reducing their mortgage interest payments.

These are among the findings of a new IFS report, funded by the Economic and Social Research Council, examining the patterns of financial help for first-time home buyers. Other key findings include:

Homeownership rates have fallen steeply in recent years, in particular for those whose parents don't own their own home:

  • The homeownership rate for those aged between 25 and 39 whose parents owned their own home fell from 60% in 2009 to 51% in 2019. Among those whose parents rented their home, it fell from 40% to 22% over the same period.
  • This means that the children of homeowners are now over twice as likely to be homeowners as the children of renters.

Parental assistance plays a significant role in driving homeownership inequalities:

  • Over half of those with university-educated homeowning parents received transfers when buying for the first time, with receivers getting an average of around 35,000. Of those whose parents rented their home, only 29% drew on financial help when buying their home, with receivers getting an average transfer of just 11,000.
  • Differences in financial resources, including assistance received, can explain almost half of the difference in home purchase rates between those with better-off and worse-off parents, holding incomes and ages constant.
  • Among first-time buyers receiving financial help, those in the South East received an average of around 31,000, while those in the Midlands received 18,000 on average and those in the North received 17,000.

Financial transfers can have a particularly large effect on the ability to afford a house for those who have relatively low savings:

  • For almost two-thirds of first-time buyers, each 1,000 they receive from parents increases the value of the house they can buy not by 1,000 but by 10,000, assuming they must put down a 10% deposit. This is because their low savings restrict the deposit they can put down and determine the most expensive property they can buy.
  • Those first-time buyers at younger ages, with less-wealthy parents, and living outside of the South East are more likely to be held back by their low savings in this way. For these people, transfers have a more transformative effect on what they can afford.

Rather than just helping people to be able to afford to buy, financial help is often used to put down a larger deposit. This tends to have very high financial returns because it reduces the interest rate paid on the whole mortgage:

  • Among those who receive a transfer when buying a house, each additional pound received in transfers is associated with putting an additional 77p down as a deposit.
  • Using a typical transfer of 25,000 to put down a deposit of 25% rather than 10% of the house value would reduce the repayments on a typical five-year fixed rate mortgage taken out in 2018 by 8,500. This compares to a return of around 850 if putting this in a typical cash ISA.
  • As a result of this, financial help is likely to drive increased wealth accumulation for those who receive more, compared to those who receive less or nothing.

Help onto the housing ladder: the role of intergenerational transfers

Company: Think Tanks

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