Saving a deposit is the place to start. The bigger your deposit, the wider your choice of mortgage loans will be. And if your deposit is worth at least 15 per cent of the property you want to buy, many more lenders will be prepared to lend to you. However, when a 15 per cent deposit on the average first-time buyer house is more than £18,000, it can be hard.
But tempting as it may be, avoid borrowing the money for your deposit from a bank or building society, or on a credit card. Before your mortgage is agreed, you will have to declare the loan with all other monthly expenditure on your mortgage application, which cuts the amount mortgage lenders will let you borrow.
In the past, many lenders were happy to lend 100 per cent – or more – of the value of the property. The current credit crunch has put paid to that for now, but these mortgages are likely to return at some point.
Affordability
Mortgage lenders have traditionally used income multiples to decide how much to let you borrow – although again, since the housing boom hugely inflated prices, this calculation can produce an affordability ‘gap’ because house prices have risen beyond these calculations.
Now, many lenders – at least 30 according to Moneyfacts – let you borrow based
on ‘ability to pay’, which sometimes allows applicants to borrow a little more.
If, for example, you have a clean credit record, no children and two incomes, some lenders may be willing to give you more because you may have a higher disposable income. Abbey, Alliance & Leicester, Standard Life Bank, Halifax, Norwich & Peter¬borough BS and Nationwide are among these lenders.
Incidentally, lenders are often prepared to offer you a little more if you choose a five or 10-year fixed rate mortgage, because the monthly repayments stay the same for a long time, which is easier for borrowers to manage.
Fees
First-time buyers can be surprised by all the mortgage-related fees and charges.
Mortgage application fees, lender valuations and stamp duty alone can start at
anything from £2,000 depending on the property price – and that’s before you move on to solicitor fees and surveys.
Research from Abbey shows fewer than 10 per cent of first time buyers put cash aside for these fees. So many people pay fees out of their deposit, further limiting their mortgage options.
Occasionally, you’ll find cashback or fee-free mortgages to first-time buyers, which provide some welcome cash at a financially tricky time. However, rates are likely to be higher on these loans and so may cost more in the long run.
Many lenders will charge you a fee called a ‘higher lending charge’ (HLC) for having a small deposit or none at all. Abbey, Halifax and Alliance & Leicester are just some of them, so always ask your bank, building society or adviser about HLCs, which can amount to thousands of pounds.
Top tips
1 Get some good advice. One of the best ways to help yourself as a first-time buyer is to seek out independent, professional advice. Family and friends are understandably the first port of call for many first-time buyers. But mortgage advisers offer more than advice and market knowledge: they can also act as your guide through each step of the mortgage process.
2 Never borrow more than you can afford. It may be tempting to try to outbid the competition for a property you like, but be realistic. Unless you take out a fixed-rate mortgage, interest rate rises can increase your monthly repayments, and added extras like furnishing your new home or ongoing bills like insurance and travel costs to your new home could become a burden.
3 Investigate Shared Home Ownership (see XXXX). Shared equity or part-buy/part-rent schemes can appeal because buyers only need to find half the deposit and mortgage amount for the same property on the open market. You only buy part of the property – usually 25 to 50 per cent – from a social housing landlord and pay rent on the portion owned by the housing association.
4 Do some mortgage research on the internet. Check out sites like www.whatmortgage.co.uk, or mortgage specialist sites www.charcolonline or www.moneysupermarket.com, where you can shop around for a mortgage to suit you and find ans¬wers to many of your questions.
Other options
High multiples
The traditional income multiples – that of 3.5 times a single income or 2.5 times a joint income came into force at a time when interest rates were much higher. While the rate environment over the past few years has been lower, many lenders are sticking to their guns. Partly this is down to ensuring the safest level of borrowing possible, but also it’s to ensure there’s no backlash from the likes of the Daily Mail who would be quick to acccuse lenders of irresponsibility.
But some lenders have become more flexibile. It’s not uncommon now for lenders to offer four or even five times your income, and a number of others, Nationwide Building Society for example, use an affordability rating – your income is less important than your ability to prove how much you can afford to pay in monthly repayments.
In the current climate, lenders don’t want to look like they’re encouraging borrowers to get into increasing debt, but if you can demonstrate you have the wherewithall to safely repay your mortgage, then you may find some solace.
Guarantor Mortgages
The idea that first time buyers will receive help from their parents to buy their first home is not a new one, but it is becoming more common and lenders are finding new ways to let families help out without actually having to part with their cash.
The way it works is that the buyer will team up with their parent (usually, although in theory it can be anyone) and their combined income, net of any other mortgage commitments, will be used to assess how much can be borrowed. While the expectation is that the first time buyer will pay the whole mortgage, both parties are liable and will be in trouble if the mortgage falls into arrears.
"This is a neat way for first-time buyers to get financial help from their parents, but without their parents having to liquidate any of their own assets to help them with a deposit,” says one broker. “Some scheme offer first time buyers an income multiple of four times salary, or, more usefully, will lend four times the parents’ income, once the parents’ existing mortgage payments have been deducted.
The child may be able to afford the repayments on their own but find it difficult to find anybody to lend a large enough multiple or to fit into existing "affordability" criteria. Or the parents may help out with the repayments for the first couple of years until the child’s earnings improve.
There used to be a number of specific guarantor products around, but that’s not so much the case today. Many lenders will still consider the idea, however.
Buying with friends
If you can’t buy on your own, why not team up with some buddies. After all, a two-bedroom property doesn’t cost twice as much as a one-bedroom, and a three-bed often offers an even better deal.
You don’t have to be part of a couple to use multiple incomes to buy a home – buying with friends is a relatively straightforward as far as the mortgage is concerned. Many lenders will consider applications from up to four people and, although they work out the amount you’ll be able to borrow differently, you’ll certainly benefit from additional incomes.
Where you will have to do the work, however, is in creating a legal agreement between all the friends. If you are contributing different amounts to the monthly payment or deposit, you’ll need to work out who owns what share. And you’ll also need to think about what happens if some of you want to sell up and the others don’t.
You must also understand that you’ll all be jointly liable for the mortgage. So if one of you stops paying, all of you will be responsible for covering the debt.
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