Rising house prices and interest rates are bad news for anyone looking to buy their first home this year. Higher house prices add £75 to typical first-time-buyer monthly costs compared to last year, and interest rate increases bring this up to almost £120, says Nationwide Building Society.
Nationwide’s chief economist says: As interest rates have increased to their highest level in over five years, the question of affordability again arises. House prices have increased by just over 10 per cent in 2006, adding almost £14,000 to the cost of a typical first-time-buyer property, but three interest rate rises in six months add considerably to the borrowing costs for this already struggling group.
Desperate times call for desperate measures, so What Mortgage has come up with ten ways to help you on your way to your first home.
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1. Borrow 100 per cent or more
Saving for a deposit as well as for homebuying costs is an impossible task for many would-be buyers, and that’s where 100 per cent mortgages come in. There is a wide choice of 100 per cent mortgages available; current best buys include Coventry and Saffron building societies, offering 5.85 per cent variable, and Bradford & Bingley offering 5.89 per cent fixed.
Some lenders offer deals of up to 125 per cent, which gives buyers some extra cash to cover costs and buy furniture and white goods for their new home. Lenders include HBOS, which offers Mortgage Plus 125 through its Birmingham Midshires brand, Accord Mortgages, Coventry Building Society and Northern Rock.
The downside to 100 per cent plus mortgages is that the borrower starts off with negative equity and any drop in house prices will cause the negative equity to increase. These mortgages are only suitable for borrowers likely to face large salary increases in future, such as doctors and lawyers, who can afford to take a risk in the early years.
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2. Borrow four or five times your salary
Traditionally lenders worked out how much you could borrow by using a simple calculation – typically 3.5 times one income or 2.5 times two incomes for joint borrowers. But in recent years, as the cost of borrowing has come down, many lenders have changed the way they do the calculation. Instead of assessing all borrowers the same way, they have started to look more closely at individual circumstances, and around half of lenders will now loan on ability to pay, with some willing to loan up to 4 or 5 times salary.
For example, Bradford & Bingley is willing to loan 5 times salary and 4.5 times for joint applicants, but restrict this to borrowers on an income over £60,000. Similarly Scottish Widows will loan 5 times a single income and 4 times joint incomes on its professional and graduate mortgages. Professionals can borrow up to 5 times salary provided they are earning £50,000 or more. Lower income multiples of 4 or 4.5 times salary can be considered for professionals earning over £30,000. Graduates with a single income of £25,000 can borrow up to 5 times salary.
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3. Take out an interest-only mortgage
With an interest-only mortgage your monthly payments only cover the interest on the loan – they do not pay off the loan itself. So you will need to make separate arrangements to pay off the loan when the mortgage ends, such as an endowment or ISA.
One way of keeping payments low in the early years is to take out a mortgage on an interest-only basis without setting up an investment and then switch to a repayment mortgage a few years down the line when income allows.
For example, on a £150,000 mortgage taken out over 25 years with an interest rate of 5.25 per cent the monthly repayments are £898.87 for a repayment mortgage, but reduce to £656.25 a month with interest-only.
But it’s important to ensure that you do either switch to repayment after a few years, or make arrangements to pay into an investment to pay off your mortgage, otherwise you will have to sell your home to repay your mortgage at the end of the term.
This time last year 20 per cent [of first-time buyers] took out interest-only loans compared with 25 per cent now, says Fionnuala Earley, Nationwides chief economist. But cheaper monthly payment now is not without strings. Not making early provision to repay the capital at the end of the mortgage term would be a highly risky and uncomfortable strategy.
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4. Extend the term of the loan
The traditional length of the term of a mortgage is 25 years, but one way to keep payments low is to increase the length of the term. A survey by Moneyfacts reveals that eight out of ten lenders now offer maximum mortgage terms in excess of 25 years. A quarter of lenders are now offering a 40-year mortgage term and a handful are offering the maximum possible term of 52 years.
On average, mortgage payments are reduced by £63, but in London this is increased to £103, says Nationwide.
But this strategy comes at a price. Extending the term of your mortgage will undoubtedly lower your monthly repayments and can be a useful means of initially affording the mortgage until your salary increases, says Julia Harris, analyst at Moneyfacts.co.uk But the longer you stay on a long-term mortgage, the more you will see your interest costs spiral.
Nationwide calculates that the total amount repayable on an average property over the full life of the loan would be more than £25,000 higher on a 30-year mortgage than on a 25-year home loan.
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5. Buy with friends
An option that is becoming increasingly popular is to buy with a friend or sibling, or even a group of friends. Most lenders will only consider two or three salaries when working out how much to loan, but some will consider four, including HSBC, Abbey, Britannia and Skipton building societies.
If you do this it is sensible to buy as tenants in common, which means you own only a share of the property and that share won’t automatically pass to your fellow homeowners should you die.
It’s also sensible to have a legal document drawn up covering who owns how much of the equity in the home and what happens when one of the owners want to sell up and move on.
Britannia has taken a different approach to joint ownership with its Share To Buy mortgage, aimed at young professionals and graduates. The scheme is offered through mortgage intermediary Graduate Network and is available for up to four buyers, and offers a mortgage of up to three times each individual borrower’s salary.
The mortgage also comes with a free legal agreement drawn up between all parties.
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6. Buy a house abroad
If buying in the UK isn’t an option, one new website is suggesting that you buy a property abroad, wait for it to increase in value and then sell it on, using the deposit to fund a UK home.
Website www.from55k.co.uk advertises properties in Spain, Cyprus, Turkey, Portugal and Crete. Its site lists properties available to buy as well as giving information on the buying costs in each country.
James Cotton, mortgage specialist at London & Country Mortgages, advises approaching with caution: Don’t just panic into buying a property. You actually have to want to buy a property abroad to do this.
Cotton points out that first-time buyers will face all the difficulties faced with buying in the UK but with the added frustrations of a different legal system and possibly a language barrier to get over too.
House prices have risen in popular parts of Europe, which has encouraged buyers to consider it as an option. If you are considering buying abroad as an investment you need to make sure that you buy somewhere where prices are going up and this can’t be guaranteed, says Cotton.
If you think this is for you, there are several UK-based mortgage lenders willing to consider loaning on properties, abroad including Halifax, Abbey and Norwich & Peterborough Building Society.
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7. Apply for shared equity
Shared equity or shared ownership schemes can help first-time buyers get onto the housing ladder, but competition for properties is fierce and you may have a hard time getting accepted onto a scheme. Turn to page 00 where you can find out all you need to know about these schemes.
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8. Get money from your parents
You could also try turning to your parents or other close family for help. One way to do this is for your parents to buy a property for you to live in. There are various ways of doing this – either buying in your name with parents acting as guarantor, or using a buy-to-let mortgage in the parents’ name with you as landlord.
If your parents aren’t quite that generous you could ask them to consider a guarantor mortgage. These allow a parent or close family member to guarantee any shortfall in a mortgage not covered by the borrower’s income.
The Newcastle Building Society, for example, is aimed at professionals earning at least £15,000 a year, but who are likely to earn enough to cover the entire mortgage in five years. The borrower can get a 100 per cent mortgage, removing the need for a deposit, with the relative guaranteeing the total amount of the mortgage, which could be as much as £500,000.
However, the lender could demand the guarantor’s own property as security against the mortgage if the combined incomes of the owner and guarantor do not cover the total amount of the loan. And if the owner defaults on the mortgage, it falls on the guarantor to pay off the arrears and future payments.
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9. Rent out a room
The government’s Rent a Room scheme means that the first £4,250 of rental income is tax-free. If you add that to a salary of £30,000 it could boost your borrowing by around £15,000. You will need to find a sympathetic lender who will be flexible and loan on your ability to repay rather than the traditional income multiples.
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10. Revise your expectations
And finally, be realistic. You may be priced out of what are considered to be some of the best areas, but you may well find what you are looking for a bit further afield. If you are prepared to do your research, you could find yourself living in the next hotspot. Look out for signs of up and coming areas, such as new transport links to an area and local indicators including the opening of restaurants, bars or coffee bars.
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