Shortening the jump on to the first rung

As New Year’s resolutions go, buying your first home is a pretty big one. But economic and property market factors in 2008 might suggest first-timers will get an easier ride. House prices are finally on their way down – falling 0.8 per cent in November, according to Nationwide – and so too are interest rates, with the first of three potential cuts earlier than expected in December, taking base rate to 5.5 per cent.

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Opportunity is good too. The average number of properties on an estate agent’s books was 77 in November 2007, according to the National Association of Estate Agent (NAEA) compared to 43 in November 2003, when the market was ‘mid-boom’. More properties mean more choice and, most importantly, more competition among sellers, says Tim Barton, a partner at estate agents Dreweatt Neate. “It is definitely a buyer’s market right now, and for the first time in as long as I can remember, first-timers are in a really strong position to negotiate on price. My advice is to do your research, don’t be afraid to negotiate and when you find that great deal, snap it up!”

No easy feat, despite market conditions

All very well, but getting the borrowing power to do this is still no easy feat. The small doses of reprieve from house price falls in recent months are dwarfed when compared to the steep rises in the cost of property over the last decade. The price of an average first-time buyer home is now £156,636 says Nationwide. This would require a salary of more than £37,000 even if you went to a ‘generous’ lender with a 5 per cent deposit and home-buying fees already in your wallet.

What’s more, the fall out of the summer’s credit crunch has placed new restrictions onto borrowing, just when first-time buyers need it most. According to research compiled by specialist first-time buyer website, FirstRungNow.co.uk , over three quarters (76 per cent) of site-users think the finance options are worse than they were six months ago. “Our research suggests that the desire to step onto the first rung of the property ladder is almost as strong as it was (92 per cent, compared with 98 per cent six months ago), but that finance options appear to be far less,” says managing director, Helen Adams.

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In this case, first-timers will still need all the help they can muster. Here are some ways to shorten the jump onto the first rung.

Opting for interest-only

You don’t have to opt for a repayment mortgage (where you repay both the capital and interest) straight away. Taking an interest-only loan will reduce your monthly payments considerably. A 25-year mortgage of £150,000, priced at 5.5 per cent, will cost you £921.13 on a repayment mortgage and £687.50 for interest-only.

But this does not mean you are making a ‘saving’ – in fact with an interest-only loan you have not even started repaying the amount you borrowed at all. This can store up problems for the future, says Sean Scahill, at Independent Financial Adviser, The Fisher Organisation. “Recently, the trend among first-time buyers has been to start off with a cheaper interest-only option for the first two or three years and then switch to a repayment mortgage. However, with property prices starting to fall, this may be a dangerous game to play because the buyer runs the risk of falling into negative equity and being stuck with a loan he or she can’t pay back if they want to move house.”

100 per cent mortgages and beyond

Over the years, in response to an increasingly unaffordable property market, lenders have agreed to bypass the traditional deposit and lend 100 per cent of the property value. According to financial data provider, Moneyfacts, there are 30 lenders in this market – 11 of which will actually lend more than 100 per cent.

For example, in September 2007, Abbey launched a ‘100 per cent plus’ mortgage that allows first-timers to borrow the full value of the property plus up to 25 per cent in the form of a secured loan on the condition that this does not exceed £25,000. In other words, it’s a 125 per cent mortgage or more for properties of £100,000 or less.

But, unsurprisingly, this mortgage is priced at a significant premium. A standard two-year fix with Abbey is currently priced at 6.24 per cent if you can stump up a five per cent deposit, but borrowing the full value of the sale price, plus £25,000 as a loan, will cost a whopping 7.34 per cent to fix in for the same two years.

And this type of borrowing is clearly not without risk either. Regardless of property prices, it puts you in a position of negative equity (where the property is worth less than what you have borrowed to buy it), from the start.

That’s why, in the current credit crisis, ‘100 per cent plus’ lending is becoming harder to qualify for in terms of affordability and your credit rating. Some lenders, have recently abandoned their 100 per cent mortgage offerings altogether. Accord no longer offers its 115 and 100 per cent loans, while Norwich & Peterborough pulled 100 and even 95 per cent lending.

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Scahill, says: “Wherever possible it makes financial sense for families to try and help out their children raise a deposit. Even putting down a 5 per cent deposit will significantly reduce monthly payments. With 100 per cent deals, you are at much greater risk of if property prices started dropping.”

Guarantor mortgages

Rather than carrying the whole burden on your shoulders and exposing yourself to risk, why not seek some help from the family? It doesn’t even have to cost them a penny if you opt for a guarantor mortgage.

These days most lenders offer a guarantor facility with any mortgage in their range. This means that if there is any shortfall in income multiples, a family member can act as guarantor for the remainder.

Some lenders focus more on this, offering specific guarantor mortgages. For example, Newcastle Building Society’s Guarantor Mortgage offers 100 per cent Loan to Value (LTV) to professional borrowers earning £15,000 or more. A blood relative can act as guarantor for any remainder, providing they qualify in terms of their income (which does not have to be from working; pensions and investments are also considered), age and existing commitments.

Be warned though that, although it’s unlikely that a second charge is required against your parent’s home, they may be liable for the entire mortgage – not just the proportion they are guaranteeing.

Shared equity (Open Market Homebuy)

If your parents are either unable or unwilling to help, you can always try the government. It operates a shared equity scheme called Open Market Homebuy which is aimed at keyworkers, such as a nurse or police officer, social housing tenant and priority first-time buyers.

To bridge the affordability gap, the first-time buyer only needs to qualify for 75 per cent of the property value, which is taken as a conventional mortgage. The loan for the remaining 25 per cent, which is known as the ‘equity loan’, is stumped up in equal measure by the government and one of the three participating lenders – namely Halifax and Nationwide and Yorkshire Building Societies. Advantage (part of the Morgan Stanley group) recently announced it was pulling out of the scheme until further notice.

The 25 per cent share of the house remains the joint property of government and lender for the five-year duration of the deal. When the first-timer remortgages or sells, both lender and government reclaim their relative percentages, making a profit if house prices have risen. If house prices have fallen they make a loss – the government being first in the queue.

Open Market Homebuy will lend up to 100 per cent of the 75 per cent stake – although if the applicant has a deposit, it can be used to reduce either the conventional or the equity loan.

To find out if you qualify for the scheme, you will need to contact the nearest of the government’s 23 Homebuy Agents to where you want to buy. Most of these are based in London and the South East where property is most expensive. If you do qualify, you will be referred to a mortgage broker and finally to a lender participating in the scheme.

Bear in mind that Yorkshire Building Society recently brought a new Homebuy product to the market, which could be a more suitable deal. It comprises of a 32.5 per cent equity loan, which is made up of a 17.5 per cent government contribution and 15 per cent lender contribution.

Buying with friends

But if you have a trusted friend to share the cost and equity with, it could be a cheaper and more satisfying option in the long run. Usually, lenders allow up to four individuals to be included on one mortgage agreement but typically they will only take the highest two salaries into account when calculating how much you can borrow. However, there are mortgages that are specifically designed to maximise affordability when buying with friends.

One example is Britannia Building Society’s Share to Buy mortgage that was launched back in 2005. The scheme allows up to four friends to buy together at up to three times each salary – so long as they are all graduates or professionals. All names will feature on both the mortgage agreement and property deeds and neither party can sell without consent from the others. Collectively, you will need to raise 10 per cent of the property value as a deposit.

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Buying with strangers

If you do not have an existing friend who wants to buy in the same location and at the same time as you, there are a growing number of websites that introduce you to people who do. These sites work like a dating agency, where you enter a profile of yourself including likes and dislikes and are matched to a suitable house mate. Look at www.sharedspaces.co.uk for an idea of how the schemes work.

Of course, when buying with people you don’t know – or even with people you do – it is imperative to seek independent legal advice, be sure of your affordability and discuss honestly expectations and long-term plans before signing anything.