Over the last 10 years, the average age of first-time buyers has risen from mid 20Â’s to mid 30Â’s, which isnÂ’t surprising when you compare the increasing difference between house prices and incomes.
Research carried out by housing charity, the Joseph Rowntree Foundation, found that young people need almost six times their annual salary to afford a basic two-bedroom house in some areas of Britain.
Martin Ellis, Chief Economist for Halifax Building Society, said, “The continuing high level of house prices in relation to earnings will curb the ability of many first-time buyers to enter the market.”
According to the Halifax house price index, the average home costs £173, 498, meaning that a first-time buyer with a deposit of around 10 per cent would have to be earning over £50,000 a year to afford a home.
Thankfully, banks and building societies are realising how tough it is for younger buyers and are launching new mortgages to help them take their first steps towards owning a home.
100 per cent mortgages
Not everyone who wants to buy their first property has enough spare cash to cover the deposit and any other costs, here 100 per cent mortgage can help.
Based on your financial circumstances, a mortgage lender can lend you the full amount for the property and this is fast becoming one of the most realistic options for young buyers.
Brian Murphy, the lending manager at Mortgage Advice Bureau (MAB), said, “There is an increasing propensity for people to borrow 100 per cent or more. Even those who have some savings find that they are eaten up by stamp duty, legal costs, mortgage applications and surveyor’s fees, leaving them unable to put down a deposit.”
Unfortunately, this type of mortgage will eventually cost you a lot more than necessary because of the higher interest rate that is charged and you are at a higher risk of negative equity should property prices fall.
Mr Murphy said, “Buyers should wherever possible try to raise a deposit and only consider a 100 per cent mortgage if absolutely necessary. Even if an increase in interest rates does not seem immediately imminent, circumstances can change fast and could leave those who have stretched themselves too far in deep financial trouble.”
Guarantor mortgages
Of course, with a little help from others, there is another way to purchase that dream house.
Guarantor mortgages are growing in popularity for first-time buyers as they allow a parent or close family member to guarantee any shortfall in a mortgage not covered by the borrowerÂ’s income.
Newcastle Building Society recently created one for young professionals earning £15,000 a year, but who are on track to earn enough to cover the entire mortgage in five years.
The borrower can then get a 100 per cent mortgage, with the relative guaranteeing the total amount, which could be as much as £500,000.
Steve Urwin, from Newcastle Building Society, said, “The Society has launched three new products to strengthen our range of mortgages specifically designed to help graduates and other first time buyers. They are also designed to appeal to parents who wish to help their children financially.”
New research form the Council of Mortgage Lenders (CML) reveals that up to half of all young first-time buyers may be getting help from their parents to fund their deposits.
James Tatch, the senior statistician at CML, said, “While older generations are able to raise funds from converted equity and other sources, the assisted route remains a viable option for many young first-time buyers with willing families.”
Of course if the owner defaults on the mortgage, it falls on the shoulders of the guarantor to pay off the arrears and future payments and in some cases lendersÂ’ demand the guarantorÂ’s own property as security against the mortgage.
Graduate mortgages
Rising university costs are making it even harder for graduates to invest in the property market.
According to the Halifax first-time buyer review, the average deposit for a typical first time buyer home is now £23, 067 and this could take a graduate up to five years to save, putting them at a significant disadvantage when attempting to buy their first home.
Mortgage Intelligence launched the ‘Uni-step’ mortgage, in association with Scottish Widows Bank, designed specifically to help graduates buy their first property.
With a guarantor, applicants could borrow up to six times their salary and even without, they have the opportunity to get a mortgage for just over triple what they earn.
Sally Laker, managing director of Mortgage Intelligence, said, “There is no charge against the parents property and the idea is the graduate will be able to support themselves within three or four years and will then be able to clear the guarantor commitment.”
The main benefit of this type of mortgage is that lenders take into account that graduates have debts to pay off and are often unable to save for a deposit, and the option for a 100 per cent mortgage is made available.
Joint ownership
The Abbey National has been carrying out research into the first-time buyer market, and found that the biggest obstacle they face when saving for a deposit is a low salary (33%).
Barry Nesbitt, Abbey’s Chief Economist, said, “With a relatively small disposable income, one in three buyers can only save up to £100 a month, which isn’t going to stretch very far. At this rate, it would take around nine years to save £13,000”
Some people find the house-buying process a lot less daunting if they invest in a property with a friend or partner.
Joint ownership is becoming increasingly common for young buyers and simply means that friends can club together to share the deposit, mortgage payments and bills.
For example, three friends, each earning around £20,000, could get a mortgage of up to £200,000 cutting the repayments down to £400 each per month.
Mr Nesbitt said, “Since most first-time buyers cannot rely on handouts, they have to save up the traditional way, although more than a third save jointly with a partner or friend.”
There are many benefits to joint ownership, with the most important one being that when you sell, if the property price has increased, you will have capital to put down on a place of your own.
The downside of this scheme is the extra costs. You need legal documents to protect your investment, which are additional to the house-purchase.
The biggest risk with joint ownership is moving on. Everyone is responsible for the mortgage and so if one person wants to sell before the others, you may have to make other arrangements, such as finding a tenant, to cover the remaining mortgage payments.
So many to choose from
Many of these options may seem a lot more complicated than the traditional mortgage, but, in practice, they can be very effective and get young buyers on the property ladder.
The only remaining alternative for first-time buyers would be to stay at home, or hand over your limited funds to a landlord, and carry on the essential saving for a deposit.
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