For first-time buyers, the dream of owning your own home seems to be getting harder. According to the latest figures by Shelter, the homeless charity, it is almost twice as tricky to get on the housing ladder as it was ten years ago.
With the average price of a first-time-buyer property being around £154,000, prices have trebled over the past ten years and, as we all know, salaries have not. An income of over £45,000 a year is needed to afford an average house price, while the deposit you need to put down has doubled in the past five years. However, achieving your goal is not impossible. There are several options open to you but you need to work out the pros and cons first.
One alternative is to look at newbuild properties, which often have headline-grabbing deals, such as stamp duty or legal fees paid, and free carpets and white goods thrown in too. The advantages of owning a new build can be attractive to the cash-strapped first-time buyer: low maintenance costs and lower energy bills are just two reasons.
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Some builders, such as Redrow, even offer a specialised Easi-Buy scheme for first-time buyers, which allows you to defer 10 per cent of the price of your new home for up to ten years on a fixed-sum basis. You can repay the outstanding amount via occasional lump sums, monthly repayments or in whole at any time. Meanwhile, Charles Church is offering to pay incentives which include £1,000 towards legal fees, a 5 per cent deposit and flooring to the value of £2,000 on selected developments. However, mortgage experts warn that you should look beyond the sales brochures.
Finding the finance
Janet Randall, marketing director of CHL Mortgages, says they have experienced problems with new builds being overvalued in the past and at one point restricted the loan to value (LTV) to a 75 per cent maximum on new build flats. This restriction has now been returned to up to 85 per cent for first-time buyers on new build properties. But she says: “We do not take any builders’ incentives into account when calculating the maximum loan available. CHL Mortgages lend against the purchase price of new build properties but deduct all incentives.”
And according to Andrew Frankish, managing director of independent mortgage broker Mortgage Talk, the Royal Institute of Chartered Surveyors (RICS) is advising its members to be cautious when valuing new build properties. He says: “All national builders are aware of these guidelines, as are specialised new build mortgage brokers. Importantly when applying for the client’s mortgage, the broker must be totally transparent as to all the new build incentives on offer. We often experience problems where other brokers and lenders fail to understand the process, and in the worst cases these can cause delays and even cause a transaction to fall through.”
Bargaining power
If you do decide to go for a newbuild, Paul Holmes, operations director of Firstrung.com, a website dedicated to helping first-time buyers on to the housing ladder, suggests that you should be prepared to haggle: “Developers often release property in timed phases and you should find out what these other phases have sold for. The developer may have sold the previous phase at 10 per cent more than the current asking price or lowered it by a similar amount. Have you missed the boat or is there a better phase yet to be released?”
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He also advises you put yourself in a better bargaining position by finding out what similar properties have sold for. Visit House.prices.co.uk or Ourproperty.co.uk to find out Land Registry statistics. Check if the development is well-occupied as owner-occupied properties tend to hold their value better in the long term than properties that are bought as buy-to-let investments. Also find out if any of the development has been earmarked for shared ownership.
Shared ownership
If a straightforward purchase is still outside your means, you could look at shared ownership. The governmentÂ’s HomeBuy scheme is promising limited help and aims to provide around 1,300 homes around the country by 2010. Around half the properties are for ‘key workers’, such as teachers, health service workers, fire or police officers, with the rest allocated to local residents who meet priority criteria.
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Eligible buyers are expected to contribute a minimum of 25 per cent of the purchase price, while English Partnerships contribute the rest by paying the developer. You then buy increased stakes when you can afford to. National builders that have signed up to the scheme include: Barratt, Bellway, George Wimpey and Crest Nicholson. If you think you might qualify, get a full list of the 23 HomeBuy Agents on the governmentÂ’s Housing Corporation website.
But according to FirstRung’s Paul Holmes, such schemes should be approached with caution too, particularly if there is a downturn in house prices or you buy a very small equity share. He warns: “Should your chosen scheme not appreciate in value over the short term this could seriously impact on your ambitions to gain further equity in the future. If you are forced to move within the first five years, you’ll be forced to pay back some, or all, of the initial discount.”
One final option to look at is co-buying, a phenomenon that has sprung up recently, particularly in the overheated South East market, where a first-time buyer property can cost £250,000. SmartNewHomes.com, the UK’s leading new-homes website has recently set up an offshoot, SmartSharedHomes.com, to help introduce buyers to each other.
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It emphasises that if you intend to buy with a stranger you need to be very up-front. YouÂ’ll need to agree how initial costs, such as legal fees, survey costs and mortgage arrangement fees will be split, and once you exchange contracts, you should also sign a Declaration of Trust, a document that sets out the legal rights of the property, including what percentage of the value you each own, how the costs of ownership will be split and how the relationship between the buyers will end.
But as Paul Holmes points out: “Only six or seven mainstream lenders see co-buying as a viable option, and 70 per cent of these lenders will only take the highest two salaries into account, so it could still be difficult to get a mortgage.” Also when you want to buy out, you will only get a portion of the equity, which may not amount to much. He suggests looking at flexible mortgages, such as the Together range from Northern Rock, which allows you to borrow up to 125 per cent of the value of your home, (95 per cent is a secured loan on the property’s value, while the remaining 30 per cent is an unsecured loan, with interest payable at the same rate as your mortgage). You can also consider an option from Kent Reliance, which offers a mortgage that takes into account lodger contributions. Although risky, they may offer a better alternative for some first-time buyers than co-buying.
Should you wait for a crash?
Finally, should you hang on and wait for a downturn in the market? Experts are divided. Nobody is predicting an 80s-style crash but there may be a correction on the cards. Paul Holmes says that over the past 30 years, property returns have seen an average of 2.7 per cent return on their investment. Currently property values have overshot this by 35 per cent. “A return to historical values would wipe out 35 per cent equity, roughly the equitable growth over the past four years. How long this correction would take is anyone’s guess.”
Janet Randall is more optimistic: “CHL does not believe the housing market has peaked as there’s still a large shortage of housing in the UK. This will drive up house prices.” And Andrew Frankish suggests: “One thing we won’t see is a crash or a serious correction as interest rates and employment levels are still
low.” This climate makes mortgage payments expressed as a percentage of monthly salary still affordable. If there are any rises in interest rates, this is a good thing for the first-time buyer, as with smaller mortgages increased payments hurt you least and it could lead to falling house prices too.
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