First-time buyers (FTBs) are an increasingly rare breed these days, thanks to house price levels. The gulf between earnings and house prices, the cost of setting up a mortgage, rising student debt and stamp duty are enough to make younger buyers despair of ever getting a toehold on the housing ladder.
“The biggest problem for first-time buyers is the cost of housing in many parts of the country,” says David Holmes, Yorkshire BS spokesman. “But with interest rates now thought to have peaked for the time being, we expect first-time buyer interest to pick up, provided of course that they can find affordable properties.”
Affordability is the key barrier to property ownership for most buyers and one the government hopes to address with its recently announced shared equity schemes for FTBs. The details have yet to be finalised over who can apply for the scheme but the Halifax suggests 15,000 first-time buyers will benefit over the next five years. However, ‘run of the mill’ first-time buyers with affordability problems are likely to be a lower priority than key workers or those already in assisted housing.
But Portman Building Society labelled the government’s plans ‘unambitious.’ “The CML has estimated that 358,000 first-time buyers (FTBs) entered the market in 2004 alone and this was when FTBs made up only 29 per cent of the market. To get FTBs back to the 55 per cent market share they held ten years before in 1994, we would need over 300,000 extra FTBs entering the market every year,” said Matthew Wyles, spokesman, Portman.
A word to the wise
But the bewildering variety of mortgages on offer, with around 4,500 products from 120 lenders, puts many first-time buyers off, says Elliott Nathan, product development manager with mortgage adviser John Charcol.
“Many people look around a few times and then give up, but a reputable broker will know which lenders provide for which situations,” he says. The interest rate rise has further dented consumer confidence, he adds, “and the negative articles on the doom and gloom associated with house prices has held buyers back from buying a property.”
Will FTBs be back in force soon? “Interest rates will no doubt be watched keenly by prospective buyers and a rise could signal the start of a slowdown in the housing market,” says Lynsey Hallam, Portman BS spokeswoman. “But other factors including house prices, the economy and consumer confidence on the high street will also impact on those waiting for the right time to buy.” We look at the options, and show you how to play your cards right.
Mortgages with FTB- friendly features
• Good deals available – fixed rates mean you can budget, or choose a discounted mortgage for lower repayments. Pick a lender that is working on affordability, not income multiples.
• Plenty of choice – Charcol ‘s first-time buyer best buys include Nationwide’s two-year fixed rate at 4.69 per cent for those with a 5 per cent deposit or Bristol & West’s tracker at 6.84 with a 5 per cent cashback to cover fees
• Or look beyond FTB deals for the best rates – fixes at 4.49 per cent with Newcastle BS, or 4.55 per cent at Portman BS with no extended tie-ins.
• Attractive deals available – look out for cash-back deals, free valuation and legal fees, and no Higher Lending Charge
Stretching affordability
• You have a chance to beat rising property prices by borrowing more than the traditional income that multiple criteria normally allows.
• Now, more lenders are looking at both your income and your career path, any monthly debt repayments, previous borrowing history, your record as a tenant and a variety of other factors.
• Lenders who do this include: Intelligent Finance, The One Account and Nation-wide, The Halifax, Abbey and Northern Rock
• For a successful application, you must have a good credit record – and need to be sure you can meet repayments
• Self-certification is an option, but don’t overstretch and run into repayment problems
Interest-only mortgages
Pros:
• The alternative to repayment loans, these interest-only loans produce cheaper monthly mortgage repayments, making them more affordable
• Attractive to FTBs especially in early years. Lenders will advise you that there must be a suitable repayment vehicle like an investment ISA, which will finally pay off the capital before the end of the term
Cons:
• A loan will not reduce loan capital on its own. Increased risk, and offers little protection against property-price falls
• Less flexibility – without equity in your property, it will be harder to switch lenders or take a repayment holiday
Buying with friends/family
Pros:
• Sharing the mortgage with friends/family can help you afford a better property
• You’ll need less of a deposit; bills and mortgage can be shared; you can split
increases in mortgage interest rates between you
• A broad range of mortgages is available – most lenders will consider two or more applicants. (Yorkshire BS, Britannia BS and Skipton BS consider up to four.)
• You can offset parents’ savings against the mortgage, e.g. with the Woolwich Offset Together plan, which links your mortgage to family savings
Cons:
• You need independent legal advice, you are jointly and severally liable for debts
• Relationships might come under pressure, you need to be able to agree what to do if circumstances change, for example if one person wants to sell their share
Shared-home ownership (SHO – part government funded)
Pros:
• For first-time buyers who cannot afford to buy a home outright.
• Priority given to existing tenants and those deemed to be in housing need
• Registered Social Landlords – often housing trusts or associations allow you to buy a part-share (up to 75 per cent) of a property. The other portion is owned by the association and you will have to pay rent on the remaining share.
Cons:
• Smaller choice of lenders
• Abbey, Britannia BS, Portman BS and Teachers BS lend on SHO.
• Interest rates not always competitive
• To buy a larger share later you buy at market value which may have risen substantially since you bought the first portion.
• You have an owner-occupier’s responsibilities without benefiting from total house price growth.
Buy-to-let
This needs a deposit of 15 per cent or more. In the North, Wales or abroad you can still buy for under £100,000.
Pros:
• Steady rental income, and capital
appreciation in property
• Option to buy more properties.
• Competitive interest rates and a choice of lenders
• Rental income of 125 per cent of mortgage payments needed to cover rental gaps. Moneyfacts best buy-to-let lenders include Bank of Ireland, Cheltenham & Gloucester and Chesham BS.
Cons:
• Rental yields vary and there may be rental voids while the place is vacant, but you continue to pay mortgage and maintenance costs. House prices could fall.
•Harder to access quickly if you need the money
•Profits taxable, though some costs can be offset against tax
Government’s £60k houses
• New initiative to design affordable £60K homes, as part of a competition run by English Partnerships for the Office of the Deputy Prime Minister
• Design is achievable, says the construction industry, but it doesn’t include development costs like roads, parking, gardens and drainage – and only 30 per cent will meet the £60K target.
• It’s good for key workers – some 30 per cent will be made available as low-cost homeownership, based on a shared-ownership scheme. The scheme will produce some homes for sale, some social housing for rent
• The £60K target does not take location into account – c
osts vary widely around Britain
• Mainstream lenders will be interested once more details are forthcoming
