The good news for people trying to leap onto the property ladder is that there are more ways than ever to secure a mortgage. All this choice, however, creates its own challenge. First you have to identify what is available. Then understand the various pros and cons. Finally, you have to decide on a loan that is right for you. But while this may be difficult, it doesnÂ’t have to be impossible.
The Council of Mortgage Lenders confirms that first time buyers now have a huge number of options open to them. “It is true,” says spokesperson Bernard Clarke. “A few years ago, things were relatively limited. But today there are a variety of possibilities.”
So – let’s take a look at the options.
Interest only mortgage
An interest only mortgage allows you to defer paying off the capital – or value of your property – instead only paying the interest. The result, clearly, is that initially you have lower repayments and more time to ready yourself for the remaining overall repayments. However, the loan will take longer to pay off, which ultimately makes it much more expensive.
Some lenders expect and some oblige you to take out an investment to eventually help you pay off the capital although the sooner you convert to a repayment mortgage, the more interest you save over time. However uneconomic and risky over a longer period, many first-time buyers continue to use interest-only as a quick fix on to the housing ladder.
Fixed rate mortgages
These home loans give you a guaranteed interest rate, usually for two to five years. Because the monthly repayment stays the same for the deal period, mortgage lenders often extend the amount they are prepared to lend. These loans give you greater control over your budget but if interest rates actually go down you will be locked into a deal that is suddenly uncompetitive.
Typical of a fixed rate mortgage is BritanniaÂ’s offering of 4.99 per cent.
Borrowing more
Some banks and building societies will lend not just three times your income but five or even six times. To qualify you will have to be an exceptionally safe bet. Then of course you must manage your money incredibly astutely, for if something were to go wrong, it could go very, very wrong.
Amongst others offering offer higher loan to income mortgages are Standard Life, Northern Rock, the Woolwich and Manchester Building Society.
100 per cent mortgages
As the name suggests this type of mortgage covers the whole cost of the property. Possibly a daunting prospect for some, it can make financial sense for many. According to the Halifax, first-time buyers take five years to save the average deposit of around £24,000. With house prices rising far quicker than savings rate, it can simply be more economical to borrow the full amount despite paying a higher interest rate for the privilege.
Those offering 100 per cent mortgages include Northern Rock, Coventry Building Society, Portman Building Society and the Royal Bank of Scotland with interest rates starting at 5.49 per cent.
Guarantor mortgage
A guarantor mortgage allows a person with some collateral behind them – usually a parent or relative – to agree with a lender to cover your mortgage should you default on it. This extra security can stretch the amount the bank or building society is willing lend. While such assistance may be useful, it may not be problem-free. Our experts warned that some guarantors can assume a right to comment on the way you are managing your finances and, therefore, your life.
Lenders who offer guarantor mortgages include Newcastle Building Society and the Co-op with interest rates of 5.49 per cent and 4.74 per cent respectively.
Bank of mum and dad
This option has many of the advantages and disadvantages of the one above. So, to stress, beware the strings and obligations of familial arrangements.
Buying with friends
In this case you not only have a financial arrangement with someone you are close to, you have a domestic one too. For singletons the benefits of multiple salaries and pooling savings are plain. A legally binding document outlining each personÂ’s rights and responsibilities can help to ensure this arrangement goes smoothly. But it will not guard against life getting in the way if one of you is made redundant, has a breakdown, or falls in love and wants their new partner to move in. Birmingham Midshires, the Woolwich and Skipton Building Society are some of the better known names prepared to lend on up to three incomes.
Shared-home ownership
Run by charitable housing trusts and part government funded, shared-home ownership is a scheme that essentially gives you a mortgage-rent combo. You take out a mortgage on what you can afford and you pay rent on the rest to the trust itself. When you sell, the sale and price growth is divided according to each partnerÂ’s equity stake. Although full of obvious advantages, there are lesser known disadvantages. Perhaps most significantly, some of the properties available are not always ideal and so donÂ’t necessarily compare well to the rest of the residential market, so re-sale gains may be restricted. Abbey, Britannia, and the Portman Building Society are among those who will lend on a shared-home ownership basis.
A cheaper property
If you can get the price of your property down you may then be able to convince a lender that you are in a position to afford it. There are various ways to do this. The keys ones are finding a place that needs ‘some attentionÂ’, one that is further from your ideal location, and one that is off-plan, where – as it is still at its drawing stage – it comes with a discount. When taking this route there are many factors to bear in mind, the most crucial predictably being the location. If a house is not based in a desirable area its resale gain may be limited.
So, if that is an overview and an assessment of your options, exactly how do you decide which is right for you? Ray Boulger, spokesperson for the mortgage specialist advisor John Charcol, offers this guidance. “Get yourself properly informed about what your options are. Recognise that each one of them will involve some sort of trade off. Then weigh up those various trade offs until you come to the one that is most acceptable to you.”
