First-time buyers are having a tough time of it. The average price for a first-time buyer property is now £138,524 and mortgage payments now account for around 42 per cent of take-home pay, compared with just 18 per cent in 1996, says Nationwide Building Society.
But it is not all bad news. In October, the government launched its latest scheme to help struggling first-time buyers. The Open Market HomeBuy scheme is aimed primarily at key public sector workers such as nurses, teachers and police officers, as well as council and housing association tenants, those on social housing waiting lists and other priority first-time buyers.
The government’s scheme explained
The scheme works on a shared-equity basis: the customer buys a minimum 75 per cent stake in a property and the remaining 25 per cent of the home is owned by the government’s HomeBuy Agent, typically a housing association, and a mortgage lender. Unlike traditional shared ownership schemes, buyers does not have to pay rent on the 25 per cent they do not own. Instead, this ‘equity loan’ is interest-free for five years. After this, the mortgage lender can charge up to 3 per cent on its 12.5 per cent 12.5 per cent equity loan until at least year ten.
Buyers’ costs are kept down because they do not have to put down a deposit and they effectively borrow 100 per cent of the money they need to buy a home but only need to take out a mortgage for 75 per cent of the property’s value.
The flip side of this is that they only own 75 per cent of the property. Borrowers also have to repay the loans when they sell up and as the lender and the HomeBuy Agent own a share of the property, they are also entitled to a share in any profits made when you sell.
Around 20,000 homes will be available through the scheme. So far four lenders are offering HomeBuy mortgages – Nationwide and Yorkshire building societies, Bank of Scotland and Advantage, which is part of the Morgan Stanley group. Melanie Bien, of SPF Sherwins, the specialist first-time buyer arm of mortgage broker Savills Private Finance, says the mortgage products are limited.
The rates of interest aren’t that great and mostly are only variable, which isn’t ideal for first-time buyers, she says. These schemes suit those who couldn’t get on the housing ladder any other way. Buyers are signing away a share of the future profit of their property. If property prices increase substantially, they may regret this. If buyers have other options, they should go for them.
A helping hand
For those who like the idea of the Open Market HomeBuy but are not likely to be eligible, Advantage offers a similar scheme, which is open to everyone. The Flexishare mortgage requires a 5 per cent deposit but the 95 per cent loan could be 60 per cent mortgage and a 35 per cent equity loan, with interest at 2.5 per cent.
If you are struggling to borrow enough money to buy a home, this product is worth considering, says Jock Cassidy of national independent financial adviser Ashley Law.
With this mortgage a buyer may be able to borrow more than they would be able to elsewhere. Buying a share in a property is better than nothing but it should also be seen as a last resort, he says.
Cassidy points out that, increasingly, first-time buyers are looking to parents for financial help. Parents can help by giving or lending their children the deposit for a home, or by acting as guarantors. Some go further and take out a joint mortgage with their offspring. As the parents’ income is taken into consideration they can usually borrow more.
Another possibility is for parents to use their savings to help reduce their children’s monthly mortgage payments. If the son or daughter takes out an offset mortgage the parents’ savings can be offset against the mortgage debt. For example, if the mortgage was £150,000 and the parents’ savings totalled £50,000, the son or daughter would only pay mortgage interest on the remaining £100,000.
Other options
For those having difficulty raising a deposit, many lenders now offer 100 per cent mortgages and some offer more to help with the associated costs of moving. But the deals come at a price. Often the rates of interest are higher and there may be extra fees such as a higher lending charge (HLC).
Special deals are also available for graduates and young professionals who have the potential for high earnings in the future. Income multiples may be higher, such as four times the annual salary, and they may be able to borrow 110 per cent of the property price.
Find a friend
Another option is to buy with friends or other first-time buyers. With more money in the pot first-time buyers can afford a property that would otherwise be out of their reach. Most lenders only consider two or three salaries, but some lenders – such as HSBC, Abbey, Skipton and Britannia Building Society – will consider up to four. Legally, only four names can appear on the property deeds, and you should buy as ‘tenants in common’.
This is not always the first choice, but by clubbing together you can bring down costs. However, there are risks associated with this, particularly when your circumstances change. Everyone is responsible for the mortgage, so if one person defaults, the rest of you have to cover the payments, warns Helen Adams, managing director of first-time buyer online advice centre FirstRungNow.com.
If you buy with other people it is essential to have a legal document drawn up, covering such issues as who owns how much of the equity in the home and what happens when one of the owners wants to sell up and move on.
If you are interested in co-buying a home and would like to be put in touch with others interested in doing this, there are a number of services you can register with, including First-property-partners.com.
A number of lenders also offer shared ownership and shared-equity mortgages. This is where you share the cost of your home with a housing association, mortgage lender or developer. With these you buy a certain percentage of the property, which keeps the cost of your mortgage down. To find out more about this and all other aspects of being a first-time buyer visit FirstRungNow.com and What Mortgage’s website.
Another way to keep the costs down is to take out an interest-only mortgage. This is around 30 per cent cheaper than a repayment mortgage but you need to make arrangements to repay the capital as soon as you are able to. Another option is to repay the mortgage over a longer-term, but the amount you are likely to save each month is small and over the long-term the mortgage will end up costing you more in interest payments.
Being a first-time buyer is not easy but with lenders bending over backwards to get your business there is no shortage of help out there.
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