Rising house prices and deposits are making it increasingly difficult for first-time buyers to get a foothold on the housing ladder. Stephen Little takes a look at what you can do to improve your chances
First-time buyers looking to get their foot on the property ladder face more challenges than ever before, with many finding themselves squeezed out of the property market due to soaring house prices and deposits.
Recent research by Halifax revealed the average cost of a first-time buyer home has gone up from 12% over the past year from £178,399 to £199,414.
Meanwhile, the average first-time buyer deposit has shot up by 14% in the last year to £33,960 – more than double the 2007 figure of £16,400.
On top of this, tougher affordability checks from lenders have also made it increasingly difficult for first-time buyers with smaller deposits to get on the property ladder.
Paula Higgins, CEO of the HomeOwners Alliance, said: “First-time buyers are finding it extremely tough. It is becoming increasingly difficult for Generation Rent to get on the property ladder, which is why we are seeing an increase in schemes such as Help to Buy and greater reliance on the Bank of Mum and Dad.
“The fundamental problem is that we have just not been building enough homes for 30 years. The issue of housing supply needs to move up the political agenda.”
What should you think about before applying?
When you apply for a mortgage a lender will check your credit history and assess how much of a risk you are. As a result of the financial crisis, more stringent affordability checks were introduced in April 2014 under the Mortgage Market Review.
The Bank of England also brought in restrictions, so most new mortgages must be worth no more than 4.5 times the borrower’s income, which limits the amount they can take on.
Rachel Springall, financial expert from Moneyfacts, said: “Affordability checks include stress testing, so borrowers will need to show that they can afford their mortgage if they were on a higher interest rate, but this can vary between different lenders – which can be very difficult for borrowers to prepare for.
“Lenders might ask questions on when you might retire or plan to have children, in addition to the usual proof of income and breakdown of outgoings.”
Lenders will assess affordability by looking at your income and outgoings, so it is important to make sure you have got your finances in order.
Before applying for a mortgage it is important to get a credit score to check if you have got a good payment history.
This way you can sort out any irregularities in your financial history and bring your debt under control to make yourself more appealing to lenders.
Higgins said: “It is not only important to reduce debt but to also show you are managing it. Lenders will want to see you have paid things off and on time. If you don’t have any credit history you will have to get one, which you can do by taking out a credit card.
“We suggest that buyers understand how lenders calculate credit scores and make sure your credit report is accurate – get things struck off if it is not right.”
Tanya Jackson, head of corporate affairs at Yorkshire Building Society, said it is a good idea for first-time buyers to get together all the documents they need before making an application.
These include three months of payslips, bank statements and details of credit cards and loans.
She said: “Make sure you have evidence if there are any blips in your finances. If you went overdrawn two years ago and it was a big expense you hadn’t expected, like replacing a boiler, bring in the evidence of to demonstrate why. It’s about having that information to hand.”
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Top tips for getting a mortgage
Paula Higgins, CEO of the HomeOwners Alliance, has a number of useful tips for first-time buyers when getting a mortgage.
How much can you afford to borrow?
A quick check using free online calculators is well worth doing. For a better idea go to a fee-free mortgage broker. They can help you understand what you can afford, explain how much deposit you’ll need, guide you through options like shared ownership and Help to Buy, and help find the right lender for your circumstances.
The hidden costs of moving
It’s not just the amount you can borrow you need to consider – lenders charge a fee to arrange the mortgage. Ask your broker what the arrangement fee is and if there are any early repayment charges. Then add on the cost of stamp duty, legal fees, survey fees, life insurance and removals. Recent reports suggest it costs £11,000 to move house.
Don’t just look to your bank for a mortgage
Make sure you shop around. This might not be so easy with mortgages and you’ll need expert help from a broker. But it could well be a better deal when arranged through a broker and you’ll feel reassured that you have searched the market for the best deal out there.
Get your documents in a row
To ensure you get your application approved quickly, get your documents ready – P60s if you’re employed or a SA302 form if you’re self-employed. Payslips and three months of bank statements are essential.
Credit rating is key
Simple steps can add valuable points to your credit score and make you more attractive to mortgage lenders. This includes registering to vote at your current address, closing any unused accounts, and ensuring you pay debts and credit cards on time, every time.
New-build homes
When buying a new-build home it is even more important to have your mortgage arranged. Developers can often work to demanding timescales – once you put down a deposit you may have only 28 days to exchange.
Save, save, save
The bigger your deposit, the better the mortgage rates you’ll be offered, making your mortgage payments more affordable every month.
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Deposit
One of the biggest problems facing first-time buyers is getting together a deposit to pay for a property.
You currently need a minimum deposit of at least of 5% of the property’s value to get a mortgage. So if the home you are buying costs £200,000 you will have to pay a minimum of £10,000 and borrow £190,000.
Taking out a deposit bigger than 5% does have its advantages as lenders will see you as less of a risk and therefore offer you a lower interest rate.
Mortgages are categorised according to their loan-to-value, the percentage of the mortgage as a value of the property. So if you decide you want a 10% deposit, you will need to take out a mortgage with a 90% loan-to-value.
Higgins said: “The more you save towards your deposit, the less you need to borrow. It is best to get as much together as you can initially as a bigger deposit will help you get more preferable rates.”
Stamp duty and other fees
When you buy a house you have to pay what is known as the Stamp Duty Land Tax, which is a progressive tax that you start paying on properties worth more than £125,000. As the price of the property increases, so does the rate of stamp duty.
Between £125,001 to £250,000 you will pay 2%, going up to 5% from £250,001 to £925,000. From £925,001 to £1.5 million you will pay 10% and then 12% above that.
So if you buy a house for £200,000 you will pay £1,500 stamp duty, which is 2% on the difference between £125,000 and £200,000.
Another important cost to consider is the mortgage arrangement fee, which can go up to as much as £2,000. While these are sometimes waived, the average is about £1,000.
When buying a home you will need to appoint a solicitor or conveyancer to arrange the purchase of the property and you should also consider getting a property survey to alert you to any potential problems before you buy, both of which can run into thousands of pounds.
You also have to pay a fee to the government’s Land Registry department, which keeps details of all registered properties in England and Wales. Fees for this range from £50 to £920 and depend on the value of the property.
Higgins said: “A lot of first-time buyers don’t realise how much failed transactions can cost. Once you put an offer in on a property there is still a huge risk involved. We know a third of transactions don’t go though, so by paying up-front costs you could end up losing thousands if you don’t get that property and have to save that money again.”
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Help to Buy
Help to Buy is a government-backed initiative designed to help people buy a property worth up to £600,000 with a deposit as low as 5%.
With the Help to Buy equity loan scheme you can borrow up to 20% of the purchase price of a new-build home. The loan comes from the government and is repaid when the property is sold. The rest of the payment is made up with a deposit of at least 5% and a mortgage of up to 75%.
Unlike the equity element, the Help to Buy mortgage guarantee scheme is open to those looking to buy an existing property as well as a new-build. It is set to run until December 2016.
With Help to Buy London, first-time buyers in the capital with a 5% deposit can borrow up to 40% of the value on a new home priced up to £600,000. They will need a mortgage of 55% to cover the rest.
Help to Buy ISAs give first-time buyers saving for a deposit the opportunity to put away £200 a month which the government will top up by 25%, up to a maximum of £3,000. The maximum you can save in a Help to Buy ISA is £12,000 and it is due to end in 2019.
The Lifetime ISA is set to be introduced in April 2017 and will allow anyone younger than 40 to put away up to £4,000 a year until they are 50. For every £4 people save the government will give them back £1, a bonus of up to £1,000 a year. The savings and the bonus can be used towards a deposit on a first home worth up to £450,000.
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Should you use a broker?
Buying a property is one of the biggest financial commitments a person can make and can be a daunting process for first-time buyers, so it is wise to seek professional advice.
One option is to go to a bank or building society, or alternatively you can go through an independent mortgage broker.
A mortgage broker is a specialist with an in-depth knowledge of the market and is able to look at a range of mortgage products to help you find the best deal.
You are not obligated to take their advice, but using one can save you a lot of time and stress in the long run. Higgins said: “We generally advise all buyers to go to a broker as they can scour the market and find the best deal. The worst thing they could do is to go and see an estate agent.
“By not getting advice you could end up paying more than you need to. If you go to an estate agent you might have to pay referral fees and by disclosing your financial information to them they will know how much you can afford to pay, not how much you want to pay.”
The lending process
A lot of people choose to get an Agreement in Principle (also known as an Approval in Principle or Decision in Principle) before they apply for a mortgage. This is a certificate or statement giving an indication of how much a lender might give and you will have to supply details of your income and outgoings.
David Hollingworth, associate director at London & Country Mortgages, said: “While it does not guarantee the borrower will be offered a mortgage, it gives them an idea of what a lender might offer.
“This may sound like a great idea but you still have to be wary. It will involve a credit check and that could leave a footprint on your file.”
Once you have an offer accepted on the home you want to buy you can then go ahead with the full application process.
Lenders will require you to provide evidence to support your application, which will include details of your outgoings, income, bank statements, ID to prove your identity and details of the property you want to buy.
After you have submitted the application for approval, which is done online in most cases, the lender will perform a credit check and then arrange a valuation of the property you are buying by a surveyor.
When the lender gets the valuation back and is satisfied with the profile of the borrower, they are then in a position to approve the application and formally offer a mortgage.
Providing you have supplied all the correct information you should get a mortgage offer within two to four weeks.
Jackson said: “We have invested a lot in the process this year to reduce the turnaround time of taking out a mortgage and getting a formal offer and we have got it down to around 15 days.
“Once the application has gone through the property is then valued and assuming everything is fine we give them a formal offer of a mortgage.
“When this is accepted we send the details to the solicitor and contracts can be exchanged on the property. The mortgage funds are then sent to the conveyancer or solicitor who concludes the transaction.”
What type of mortgage should you get?
When it comes to selecting a mortgage the number of choices available can seem mind-boggling, making it difficult to know exactly where to start.
The two main options are a variable rate mortgage, which can change, or a fixed rate mortgage, where the interest rate stays the same over a set period of time.
You can usually fix your mortgage for two, three or five years and some lenders even offer a mortgage term of 10 years.
They tend to be offered at a higher rate than variable rate mortgages, but that is because they give borrowers added security.
With a variable rate mortgage you can either get a tracker, where the interest rate follows the Bank of England base rate, or a standard variable rate, which is set by the lender.
Hollingworth said: “First-time buyers prefer to opt for a fixed rate mortgage so they know where they stand for a period of time and can budget with certainty. They can then review the deal when it comes to a close.
“Many often shy away from variable rates as although they can go down, if interest rates start to move up the mortgage can get more expensive.”
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Case study: Buying your first home
Rachel Tilley and her partner Jason McNiff bought their first house earlier this year for £145,000 in Silsden, West Yorkshire.
They took out a three-year fixed rate mortgage at an interest rate of 3.04% with a 10% deposit after speaking to Yorkshire Building Society.
Rachel says: “We chose a fixed rate mortgage because it could prove a safer bet than a variable rate mortgage. As it is our first time paying bills we wanted to begin the mortgage knowing exactly what it was going to cost us every month.”
Both in their twenties, they spent four years saving up for the deposit and moved in with Rachel’s parents to help boost their finances.
After shopping around they chose Yorkshire Building Society as they already had a savings account with them.
Rachel says: “The most difficult thing about being a first-time buyer was not knowing what to do or how to start the process. We went into our local branch and they were really helpful, so we didn’t look anywhere else after that.”
After going in for a pre-mortgage meeting and getting an Approval in Principle they decided to go ahead with the full application process.
Rachel says: “They asked us questions about affordability and we showed them bank statements and payslips. We discussed with them the size of deposit we were looking to put down as well as the fees and that we would have to pay.
“Then they talked us through the monthly repayments and types of mortgage on offer. We found the process quite straightforward and it went through very quickly.”
Rachel recommends first-time buyers get their credit history checked so they can bring their finances under control and avoid any problems further down the line.
She says: “We made sure we got our finances in order and that a majority of our debts were paid off. If you apply for a mortgage and it gets refused this could hit your credit rating, so it is worth knowing where you stand beforehand.”
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35-year mortgages
While a mortgage is typically taken out for 20 to 25 years, first-time buyers are increasingly taking out mortgages for longer terms.
By doing this you can reduce your repayments as they are spread out over a greater number of months. However, this means you end up paying interest for longer, which increases the cost of your loan.
Springall said: “First-time buyers may prefer to take out a 35-year term on their mortgage and overpay their loan to reduce the amount they owe, then in a couple of years when they look to remortgage weigh up whether they could cut down the term of the loan further still.
“Overpaying means reducing the capital borrowed and will really help open up doors to more competitive deals down the line.”
Government schemes
The government has introduced a number of new schemes in recent years to help those looking to buy a home, including Help to Buy and shared ownership.
Springall said that while the Help to Buy scheme had been successful in getting first-time buyers onto the property ladder, the closure of the mortgage guarantee scheme at the end of the year could see the number of low deposit deals fall.
“We have already seen the number of residential mortgage deals available fall from 270 in March for borrowers with a 5% deposit to 233 today and this is likely to drop considerably further when the Help to Buy mortgage guarantee scheme ends this year, perhaps even below 150 deals.
“A drop in product availability could mean less competition, which is bad news for anyone waiting for interest rates to fall further still.”
For those having difficulty getting a deposit together for a mortgage, with its 25% government bonus the Help to Buy ISA is a no-brainer.
Springall said: “It is wise to grab a Help to Buy ISA fast as we have had several rate cuts this year. Borrowers must remember that they will not see the 25% government bonus until the money for the home is transferred.
When the Lifetime ISA becomes available it will be an additional boost for any saver looking to put money aside for their retirement or using a Help to Buy ISA towards their first home.”
Shared ownership is another option for first-time buyers who are maybe finding difficulty in getting on the housing ladder.
It is aimed at people that can’t afford a mortgage on 100% of a home. Shared ownership schemes are provided through housing associations and allow people to part-buy and part-rent properties, increasing their ownership over time.
Springall said: “Shared ownership is an option for those with limited deposits or a modest income and who cannot afford to buy a property outright. The arrangement works by owning a small portion of a home and pay rent on the remainder. It is worth seeking independent financial advice when looking to enter any arrangement to ensure it’s the right deal for you.”
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