14th May 2014
Consumer journalist Jill Insley looks at how first time buyers can take the first step on to the housing ladder.
Critics say the Government’s Help to Buy scheme has helped to take homes even further out of the reach of those the scheme was designed to assist – first time buyers.
Help to Buy has made high loan-to-value ratio mortgages available for the first time since the banking crisis in 2008. But in some areas of the country, the ensuing rush to buy property has already inflated house prices way beyond the reach of most aspiring homeowners.
The average single first time buyer, even one with a 10% deposit, faces a £23,735 shortfall, according to calculations by independent estate agency network Move with Us.
While the price of flats has increased by 5.4% in the last year, average wages in Britain have increased by just 1.6% and the average easy access savings account has paid a parlous 0.67%, according to the Office for National Statistics and MoneyFacts.
So how can first time buyers achieve that ultimate goal – a home of their own?
Help to Buy
The Help to Buy scheme comprises two different deals. The first part restricts the buyer to new build properties, while the second part of the scheme, known as the Help to Buy Mortgage Guarantee, enables borrowers to buy existing as well as new housing stock. The borrower must put down a 5% deposit and borrow 95%, with 20% of the loan covered by a government guarantee.
Thirteen lenders offer nearly 50 different Help to Buy mortgage guarantee loans. Others have been encouraged to offer 95% loan to value ratio mortgages outside the Help to Buy scheme, and there are now more than 120 deals available.
“This scheme has improved the availability and rates of mortgages for those with small deposits, which will potentially give first-time buyers more choice,” says Charlotte Nelson of product data firm MoneyFacts.
But she adds: “Borrowers should try and not be wowed by these schemes – instead they should look at the whole market as often there are lower cost options outside the Help to Buy scheme.”
David Hollingworth of mortgage broker London & Country warns that lenders will charge more for Help to Buy and higher loan to value ratio mortgages, and require prospective borrowers to pass stringent credit record and affordability checks. The Woolwich checks that standard borrowers can afford mortgage payments at an interest rate of 6.74%. But the lender checks affordability up to 7.49% for those wanting a high loan to value mortgage.
“They are not simply flinging the doors open to people with a 5% deposit,” he says.
Bank of Mum and Dad
Obtaining a mortgage is likely to be a whole lot easier for those lucky enough to have parents able and willing to help – either by funding the deposit, or guaranteeing the mortgage.
“Where parents are providing the deposit, lenders will want to see that it is an outright gift,” says Hollingworth.
That’s fine if the borrower is buying alone, or splitting the costs on an equal basis. But if one borrower is putting forward a bigger deposit or paying a larger part of the mortgage than the other, it makes sense to get this reflected in a legal contract. This may seem unromantic, but it will save arguments over who contributed what if they split up later on.
Guarantor mortgages allow a parent to guarantee a mortgage: they will be held responsible for meeting repayments if their child is unable to pay.
“For first time buyers, having a guarantor can often mean that they are able to get on the property ladder, borrow more than the bank normally would allow and the criteria are often less harsh,” says Nelson.
“Rates on guarantor mortgages also tend to be slightly lower than those of ordinary first-time buyer products.”
Parents may either provide savings as security or the lender can take a charge against their home. The latter is good for families who have a lot of equity tied up in their home but are cash poor, says Hollingworth.
Keeping costs down
Many first time buyers focus so hard on getting the mortgage they need to buy their dream home, they forget about the additional costs associated with buying a home. These include conveyancing fees, survey costs, a mortgage application fee and stamp duty, and can easily add up to thousands of pounds, even for a first home.
Some lenders offer a free survey, cashback or a small application fee in return for a slightly higher interest rate. People buying new build properties may even find the developer is willing to meet the cost of stamp duty, or will pay the mortgage for the first few months.
Nelson says: “First-time buyers often do not have the funds to cover all upfront costs so it would be wise to look at keeping these to a minimum with low or no fee deals and incentive package deals to suit.”
The best way to keep mortgage interest costs down is to save as big a deposit as possible, says Hollingworth. The interest rate will drop and the choice of loans expand for every extra 5% the borrower can put towards the cost of the property.
Some lenders also offer “family offset” mortgages, which allow parents to set their savings against the capital sum of their child’s mortgage. While this reduces the amount of interest the child will have to pay, it won’t result in a bigger mortgage.