Making your first move

Chancellor Gordon Brown also disappointed many FTBs by only raising the first tier for stamp duty £5,000, to £125,000 in the last Budget, doing little to actually cut costs for those with the least to spend. Nor will stamp duty – which rises to 3 per cent of the property price over £500,000 – be the only extra cost first-time homebuyers face. With mortgage application fees (roughly £300–500), solicitors’ fees (anything from £700 upwards) and valuation and survey fees, most FTBs can be in for a fiscal shock.

“It’s always been difficult for first-time buyers,” says Ray Boulger, senior technical manager at John Charcol, “but probably no more difficult now than in the late 80s and early 90s, when interest rates were regularly in double figures.

“The big difference is that the ratio of house price to income ratio was then just three and a half but is far higher today, which can make the hurdle appear insurmountable.”

Bank of Mum & Dad

Over the past decade, the numbers of first-time buyers with far bigger deposits than they could reasonably have saved has jumped from under 10 per cent to almost 50 per cent, says the CML. Many buyers now either enlist their inheritance or get help from their parents.

“ For some home owners, helping out their children by buying into their property with a mortgage deposit may represent an efficient use of funds, in the light of low returns on alternative investments,” says CML senior statistician James Tatch. “For others, the help won’t be an investment decision as much as a case of the family ‘pulling together’ to get the younger generation into home ownership.”

The CML report suggests unassisted buyers under the age of 30 choose cheaper properties and tend to borrow a medium-level income multiple.

However, FTBs over 30 tend to have higher incomes and larger deposits, enabling them to buy more expensive properties. There is another category too, which the CML labels ‘returnees’, who have sold a property without buying again, but have once again returned to the property market.

For whatever reason, these buyers have also been counted as first-time buyers but unsurprisingly tend to have higher than average deposits, unrealistically inflating statistics on the size of the average FTB deposit.

Saving yourself

Figures from the Halifax show that it takes typical first-time buyers five years to save the average borrower deposit of £23,967, compared to a three-year saving period for a smaller amount just five years ago.

“First-time buyers need to save harder and for longer than ever before to put down a decent deposit on a house,” says Tim Crawford, group economist at the Halifax.

Saving is undoubtedly an uncomfortable experience for first-time buyers in waiting, knowing that house prices are rising just as fast as they can save.

Many who decided to wait for the 20 per cent falls in house prices predicted by certain City economists have also been disappointed as prices slowly continued to rise.

Boulger argues that these savers could simply get on the housing ladder sooner instead of investing the money, which makes little sense in the short term. “Even if you expect property prices to increase at just 4 per cent a year, that means that if you defer buying a property for five years while you save a deposit, you are paying 20 per cent more for that property.”

It makes more sense, he says, to choose a 100 per cent mortgage and pay 1 per cent more in interest than on a 90 per cent mortgage.

“We’ve noticed an increased number of first-time buyers taking 100 per cent mortgages,” agrees Coventry Building Society spokesperson Tina Shields, “which would indicate that fewer people are saving a deposit.”

“As many as 21 per cent of our customers are using a 100 per cent loan,” confirms Duncan Pownall, mortgage development manager at Bradford & Bingley, “demonstrating that saving for a deposit is no longer an option for many FTBs, with as many as 44 per cent admitting they are still paying off debts.”

Rising university costs and student debt make it harder to save a deposit, warns Newcastle Building Society, which has just launched a 100 per cent mortgage at 5.50 per cent for five years.

Interest only?

Since just before Christmas 2005, first-time buyers have started to look into the housing market again after interest plummeted in the middle of last year.

But these FTBs continue to face higher house prices and rising interest rates.

“Buyers are struggling not only to afford to buy a home but also to repay their mortgages,” says Peter Gladdy, director of Mortgages Direct. “As a result more borrowers are opting for interest-only mortgages instead. However, this trend is worrying and not advisable unless a comprehensive repayment method is in place.”

An interest-only mortgage gives you cheaper repayments, but how do people pay off the capital? Most mortgages allow you to make overpayments, so many start paying off the capital when they can afford to rather than paying further fees to switch to a repayment mortgage.

And if you plan to move house three to five years later, the increased equity basically gives you a larger deposit on your next home, advises Boulger.

But working out ways of paying off the capital is crucial. “Encouragingly, only 9 per cent of first time buyers are plumping for an interest-only loan,” says Pownall. “Despite monthly payments being cheaper, buyers are realising they must repay the capital element of their loan too.”

Fixed interest

Some lenders are willing to offer borrowers more if they choose a fixed- rate loan, but this generally means being tied in for some years.

Choose a longer-term fixed rate of at least five years and you could get a higher income multiple, of four and a half instead of four times your income, say. “But you could get that extra 0.5 per cent from another lender in any case,” says Boulger, “which is why you need an independent mortgage broker.”

Your lifestyle can make all the difference too, warns Pownall: “These deals usually cost the borrower a little more over the longer term, but the loan amount is dependent on their individual circumstances including credit rating, the property they are buying and the deal they have chosen.”

Guarantee the difference

Another option if affordability is a problem is a guarantor mortgage. Guarantor mortgages allow you to enlist your parent’s or relative’s borrowing power to boost the amount a lender is prepared to let you borrow.

If your guarantor is willing to take full liability for your loan in case you default, if only for the first two or three years of the loan, that decreases your risk profile in any mortgage lender’s eyes.

Boulger says that the costs and interest rates are higher for these loans, but that’s because there are fewer mortgage lenders offering them.

“Around one in five first time buyers is receiving help from their parents,” says Pownall, “by taking out a guarantor mortgage and using their parents’ income to help them onto the ladder. Commonly these loans require a 25 per cent deposit.”

So first-time buyers can borrow more than standard income multiples allow because the loan is guaranteed by a parent or close relative.

Lenders who offer guarantor mortgages include Leeds Building Society, Portman Building Society, Nationwide Building Society, Newcastle Building Society and Northern Rock.

But the market is changing too, says Pownall: “There are variations on the traditional guarantor mortgage such as Bank of Ireland’s First Start mortgage, where the lending is based on four times the parents’ income and one times the child’s income. This is available to 100 per cent loan-to-value.”

Hope springs eternal But hope continues to spring eternal among FTBs still waiting to buy their first home.

“There def
initely appears to be more optimism among graduates – people saying they could never imagine getting on the property ladder have reduced slightly,” says Murdo McHardy, senior manager for product development at Scottish Widows Bank.

“There is still the real desire to become home owners, but how people achieve this is changing.” According to a Scottish Widows report, some 62 per cent of graduates said that buying a part in a property, with friends, family or via a shared ownership scheme funded by the government or a lender, is probably their most viable option.

The government continues to support shared home ownership (SHO) with a £970 million budget allocation to help first-time buyers.

Shared homeownership schemes allow borrowers to part-rent and part-buy a property. Borrowers can always ‘staircase’ later, which means buying another portion of the property, although house prices can rise away from many homeowners, which can make this option unaffordable. For more details on government-sponsored shared home equity schemes, visit the website.

However, affordability will still be a problem for many, even with a 25 per cent equity loan or other helping hand.

Tammy Richardson, managing director of Genworth, says: “In London, for example, only a small proportion of the first-time buyers the government is committed to helping will actually be able to benefit from this scheme.”

She added: “Only by the remortgage industry and credit risk specialists working together to launch innovative high-LTV mortgage products will first-time buyers really be given a helping hand.”