For many potential first-time buyers the idea of ever getting on the property ladder seems like wishful thinking. But don’t despair – it is possible to buy a first home without breaking the bank. Elizabeth Henry reports
House prices are the bane of many first-time buyers, and the problem seems to be getting worse. While in parts of the UK prices are well above the record highs of 2007, wages haven’t kept up. There are signs prices may be leveling off, but as long as price inflation moves faster than wage rises the gap will continue to widen.
While saving a deposit has been the biggest challenge for many first-time buyers, new research from the Building Societies Association shows accessing mortgage finance is now a bigger barrier to owning a home. Fifty-seven per cent of first-timers say getting a mortgage is the most difficult hurdle to overcome, up from 41 per cent in June and 33 per cent in September last year.
This year the government introduced strict new rules to make sure lenders loan money responsibly. The launch of the Mortgage Market Review (MMR) in April means lenders must look closely at your spending patterns and run a “stress test” to ensure you would cope if interest rates rose.
And on 1 October, new limits were introduced so lenders could only write 15 per cent of their mortgages on loans greater than 4.5 times the borrower’s income. In some parts of the country this is not a problem as houses are relatively cheap compared to incomes. But in the South and South East average house prices are often more than 4.5 times the average salary. It remains to be seen how this will affect first-time buyers.
It’s not all doom and gloom
Despite a lot of negativity in the headlines, it’s actually easier for first-timers today than it was two years ago, according to Richard Sexton of chartered surveyors e.surv. This is partly thanks to government schemes like Help to Buy, which encourage lenders to offer higher loan-to-value ratios – meaning you can get a bigger loan with a smaller deposit. Nonetheless, “the level of deposit required remains a real barrier to many first-time buyers, who can afford monthly payments but not raise a deposit – forcing them into rented accommodation,” Sexton says.
Know your financial limits
Buying a house may be the biggest financial decision you ever make. Especially if you haven’t yet found a property you like, now’s a good time to work out what you can afford and stick to it. There are plenty of online affordability calculators – try the one on our website at whatmortgage.co.uk.
The UK has seen record low interest rates for more than five years, but these will almost certainly increase by some time next year, increasing repayments for people on variable-rate mortgages. So don’t just look at what you can afford based on the current rate – work out whether you could make repayments if interest rates climbed by 2 or 3 per cent.
In a recent YouGov survey, 27 per cent of mortgage holders predict they will struggle when interest rates rise. One fifth think they will be forced to cut back on essentials like clothing and food. You may be able to stretch a mortgage out over a longer term to reduce payments, but that may mean a substantial increase in the total amount you pay over the lifetime of a mortgage. If you have flexibility about where you plan to live, it may make more sense to find a cheaper first home.
Location, location, location
Rising average prices across the country mask substantial differences between regions. London prices are rising at double the pace of the rest of the country, and in fact in August prices in the North West and South West actually fell by 0.1 per cent, according to the Land Registry.
If you want more bang for your buck and are mobile, it makes sense to look further afield from London, Sexton says. “Lower prices in regions such as Northern Ireland and North East England mean that there is often less of a challenge in these areas.”
But at this stage of life it’s a matter of “needs must”, he says, as choice of location is often driven by proximity to jobs. If you’re likely to resell then make sure you keep an eye on the future, he says.
“First-time buyers should buy property which is readily resaleable and which has a reasonable level of demand. Buying something quirky may be a dream but the dream can go sour if other purchasers don’t share your unusual tastes.”
With this in mind, new build property can be a good bet. It offers certainty over how much maintenance and repair work will be required, particularly if it comes with an NHBC certificate. Remember though that there will probably be a newbuild premium as a trade-off.
Sexton suggests targeting new-build developments that are almost finished. You may be able to negotiate a good deal with a developer who is wrapping up a job and is keen to sell off the last few units so they can start their next project. And if you’re buying an older property, get a full survey done rather than relying on the brief report commissioned by the lender.
“The average cost of undiagnosed repairs for those not having a property surveyed is circa £2,000 and can be much higher. A private survey can help you spot these potential costs and help negotiate a better price with the vendor.”
The lending process
Many first-time buyers will approach one of the bigger lenders first when looking for a mortgage. We asked Santander’s Michael Rosen what the bank offers for first-time buyers.
“All potential new buyers will usually go to the branch to have chat with the adviser to discuss their plans, check whether they are eligible for a Santander mortgage and do a basic affordability check,” Rosen says. “If they have a house in mind, then we can arrange an appointment with a mortgage adviser to go through the application with them, which will take about 1.5-2 hours.”
It currently takes about 10 days to hear back from the bank with an offer. Around 20 per cent of Santander mortgages go to first-time buyers. If you haven’t yet started househunting, try to get a mortgage in principle – an assurance from the lender that they will lend you a certain amount, subject to credit and affordability checks. Estate agents and sellers will take you more seriously if you’ve already got a lender’s approval.
Santander expects first-timers will have a smaller deposit than someone who already owns a property. With that in mind the bank offers them extra help, including exclusive mortgages with only 10 per cent deposit, a zero booking fee on products, and free standard valuation under certain conditions.
Getting government help
The government’s Help to Buy scheme has been a big boon for first-time buyers, with the option of paying as little as five per cent of the property price as a deposit. Santander, like most big lenders, supports the government’s Help to Buy: Mortgage Guarantee and Equity Loan schemes and also offers Help to Buy: New Buy through intermediaries.
So far more than 48,000 people have got mortgages through Help to Buy; more than 90 per cent of these were outside London. Our guide on page 32 outlines what’s on offer through Help to Buy.
Choosing a product
There are now more than 12,000 mortgage products available in the UK. With so many options – fixed, variable, tracker and discount rates and a huge variety of terms, contracts and fees – it can be confusing making the best choice.
Fixed rates are very popular right now. In August, 94 per cent of home buyers opted to fix, probably in the expectation that rates will go up. However, a fixed rate may not be best for you. This is why, along with online research and talking to friends and family, it’s wise to talk to an independent mortgage adviser or broker who can help you navigate the market. Brokers also have access to mortgage products you can’t get directly, and can talk you through affordability checks and point you to suitable lenders.
Don’t neglect alternative lenders
Big lenders often assess your application by computer, which may result in a rejection. But at smaller lenders like building societies, borrowers are normally assessed manually to decide if they pose an acceptable risk. If you have unusual circumstances such as self-employment, a computer may flag you as too risky. But if you can prove that you can afford the loan, smaller lenders may take a risk where the big lenders won’t.
Think outside the square
A survey by removals company Bishops Move showed 42 per cent of 25- to 34-year-olds said raising a deposit was
the greatest challenge in buying a house – compared to 23 per cent of 35- to 44-year-olds.
Many younger people simply can’t scrape together a deposit big enough for soaring house prices. But there are other options. For example, if you can buy a house with a friend or relative, you could double your buying power.
Increasingly, first-time buyers are also turning to their parents for help. Research from housing charity Shelter shows parents who help their kids buy property give or lend an average £23,000. But in one in five of these cases the money was originally earmarked for retirement, while 60 per cent of parents simply can’t afford to help at all.
There are other ways your relatives can help without giving away their money.For example, a Family Mortgage from the newly launched Family Building Society lets parents or grandparents provide security through property, savings, or security through offset, without physically giving or loaning the first-time buyer the money.
Spokesman Keith Barber says since launching in July The Family has received a “significant number” of applications – suggesting its product is filling a gap in the market.
The Family Mortgage also offers unemployment insurance, protecting both borrower and family if the borrower loses their job through no fault of their own. However, if the property is sold for less than the amount of the mortgage the lender will ask the relatives to cover the shortfall.
“This could mean using some or all of the pledged savings to cover the loss or if their property has been used as security it may need to be sold,” Barber says.
Keep your head
Ultimately, buying a house is a dream for most people, e.surv’s Richard Sexton says. And he warns that due to economic realities, people are sometimes disappointed.
To minimise your chances of having your dreams dashed, remove as much emotion from the decision as you can, and practice “the art of the possible”, Sexton says. Ask questions like “Is the house suitable for my needs? Is it within my budget?”
Finally, be patient. House prices have tended to rise over time, allowing most people to move to bigger and better houses during the course of their lives. The key is to get onto the first rung of the ladder, even if it’s not your dream home. “Within reason, pulling out the stops to get that first property is an excellent investment and use of funds for 99 per cent of first-time buyers.”
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Case study: Splitting costs when you can’t afford to buy on your own
David Share and his twin sister were both living with their parents when they decided to buy a flat in North London
together seven years ago.
At the time, the flats’ developer was offering to stump up the 5 per cent deposit if the buyer put up another 5 per cent. David and his sister each paid £6,000, buying the house for £244,000.
“We were both based in London with reasonable jobs, and could only afford it with our combined salaries – so it just made sense,” David says. “It would have been impossible to afford it without her. I maybe would have found some one-bedroom studio somewhere but it wasn’t even something to think about or
consider.”
The twins lived in the Hertfordshire flat for three years, after which she got engaged and bought a house with her husband. David’s girlfriend was renting at the time so he paid his sister out for her share of the property and his girlfriend took over the mortgage deed. Now married and with a new baby, David and his wife plan to sell the house and buy a new one.
Due to the financial crisis, it took until 2013 for the house to return to the price the twins paid; but it’s since been valued around £285,000. Since David and his sister bought their house, options like ShareaMortgage.com
have sprung up. The website brings together like-minded people who want to share the costs of buying a UK property, and helps them through the buying process.
David says he now recommends the website to friends who can’t afford property and don’t have a twin to buy with. “If my sister had been younger or we didn’t want to live together, I would definitely use something like Sharea-
Mortgage. It’s a brilliant offering and it’s unique,” he says.
The one recommendation he would make is to have a joint account, into which goes all the money for bills, mortgage payments and other costs like Sky.
“And as with any relationship you need to communicate. From the beginning it’s important to have boundaries, and it’s all got to be equal.”
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