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First time buyer

First Time Buyers 10 steps to success

It’s not easy getting your foot on the housing ladder; it never has been. But there are some new and inventive ways of taking that first step. Laura Brady reports

These days, everyone feels sorry for first time buyers. In the past 10 years, house prices – especially those in London and the South East of the country – have spiralled out reach of the average young person’s earnings. So, despite a run of low interest rates, low unemployment and healthy levels of inflation, currently only 45 per cent of all lending is to first-time buyers, says the Council of Mortgage Lenders (CML). This compares to 67 per cent 10 years ago. And the average age of a first-time buyer has now risen to 34, says the CML.

But it’s not all bad news. Today’s first-time buyers have the distinct advantage of the widest range of mortgage schemes and products in history. Here are 10 top tips to make use of them and get onto the housing ladder:

1. Clear your debts and start saving
 It’s easy to dismiss saving as an old-fashioned phenomenon. But clearing your debts and getting together a lump sum of money before approaching a mortgage lender can prove invaluable.

If you can accrue savings amounting to a five per cent deposit, the doors of almost every lender will be open to you. In addition, you will be eligible for the majority of the best deals that the lender offers. As well as providing the luxury of choice, this may also mean paying a lower interest rate and less in lender fees. And of course, the more deposit you can muster, the smaller the size of your mortgage, and the lower your monthly repayments.

In addition, when calculating how much you can borrow, more lenders are now using an affordability criteria (when they look at your monthly outgoings) opposed to income multiples (when they multiply your salary by say, 3.5). “This means that the less outgoings you have in debt, the better proposition you are as a borrower,” says Jennifer Holloway, spokesperson for Skipton Building Society. “And having a deposit as well will reassure the lender that you can organise your finances sufficiently to cope with a mortgage.”


But with the average first-time buyer home costing £128,842, according to Nationwide Building Society figures, this means saving £6,442 before you have even thought about home-buying costs, which alone can run into
thousands.


2. 100 per cent mortgages

If home-buying costs – which include legal, valuation and removal fees – are all you can save, you could look at taking a 100 per cent mortgage. This allows you to borrow the whole value of the property, forfeiting the deposit altogether. But you will pay for it.

Yorkshire Building Society has a 100 per cent mortgage currently priced at 6.55 per cent for the first five years – that’s the society’s standard variable rate (SVR) plus a loading of 0.25 per cent. Although there are no tie-ins or fees to pay, the rate is a whopping 2.06 per cent higher than on its equivalent five-year fixed rate mortgage (4.49 per cent), which of course, requires a five per cent deposit. However, in an increasingly competitive market, there are some more reasonable deals. The Co-operative Bank has just launched a 100 per cent loan fixed for three years at 5.04 per cent at 3.75 times single income.

Be wary, when taking a 100 per cent loan, of paying a Higher Lending Charge (HLC). This fee is levied by some lenders for borrowing over either 90 or 95 per cent LTV. As you will be classified as a high-risk borrower, the HLC pays for the lender’s insurance should it need to repossess your property in the event that you default on the loan. Some mortgage providers, such as the Cooperative, Nationwide and HSBC, have scrapped this charge but beware of the ones that haven’t – it can run into thousands.

…and more

You can even borrow more than 100 per cent of the house purchase price. Northern Rock, for example, has a mortgage called Together, which will lend up to 125 per cent LTV. Although 30 per cent of this is an unsecured loan (so effectively the mortgage is 95 per cent LTV), the entire loan is payable at the rate of the mortgage – currently fixed at 5.89 per cent for two, three, five or seven years. On this version of the deal an arrangement fee of £695 is payable.

3. Graduate and Professional mortgages

The basic rule of lending is that you get back what you give. That’s why if you are a graduate – and therefore a potential high earner – some lenders will be more lenient, even if you do want to borrow 100 per cent. HSBC for example offers borrowers who have graduated in the past seven years standard mortgage rates but will extend the loan to 100 per cent LTV opposed to its standard 95 per cent LTV. It will also lend at four times income.

“Recent reports estimate that many graduates leave university with debts of over £12,000,” explains Carina Kemp, head of mortgages at HSBC, “so it stands to reason that they will be more concerned about repaying their debt than saving for a deposit on a property.”

And if your degree is the sort that will lead you into a professional career in which your income will rise quickly over the next few years, a lender may be more lenient still. Scottish Widows’ Professional Mortgage will lend doctors, dentists, accountants, solicitors, teachers, vets and pharmacists who are practising with a registered body, 110 per cent of property price at four times a single salary. This extra 10 per cent, payable on completion can help with a multitude of home-buying costs.


4. Cashback mortgages

If you are ‘none of the above’ but still need a helping hand with an injection of cash on completion, there is always a cashback mortgage. Although several lenders will now offer a token of cashback – £250 is fairly typical – a true ‘cashback mortgage’ will pay out a more significant sum on completion. Although, in theory, this cashback is not repayable to the lender, you will pay for it in other ways.

Scarborough Building Society for example has a cashback mortgage which pays out 11 per cent of the loan on completion. But the rate is fixed at a non competitive 6.69 per cent for 10 years. And if you try to redeem the mortgage during this time not only will you repay the cashback – although the percentage that is repayable reduces each year – but you will also face a hefty redemption penalty.


5.Shared ownership schemes

If you just can’t get both feet on the housing ladder, you could always start with one. Shared ownership is when you buy only a proportion or ‘share’ of a property. The part that you do not buy is bought by a housing association. Rent is then payable to the housing association on the part that you do not own. The amount of rent you pay is calculated on social housing terms and will be proportionally less than your mortgage repayment. When your salary allows it, you can buy more shares in the property from the housing association – a process known as ‘stair-casing’ – until you own 100 per cent.

Several lenders offer mortgages for shared ownership purposes . Ipswich Building Society for example, will offer a 100 per cent LTV of the share of the property you want to buy. So if you want to borrow 50 per cent of a £120,000 house, it will lend you £60,000. The minimum share you can buy is just 20 per cent, which compares to 25 per cent offered by most other shared ownership lenders. “And we are in talks to reduce this further still,” says Paul Winter, sales and marketing director for the lender.

Each time you want to buy more shares from the housing association – which must usually be in minimum chunks of 10 per cent – you will have to pay the lender a valuation fee. Bear in mind that every 10 per cent share will become increasingly expensive, providing of course house prices continue to climb. “But even if the new value goes beyond the lowest threshold, you won’t pay Stamp Duty,” says Winter.

You will need to approach your local housing association and put your name on the housing list before you applying for a shared ownership mortgage.

6. Shared equity schemes

If you are a key worker, such as a police officer, teacher, NHS or prison worker, you could potentially qualify for a shared equity scheme. These schemes form part of the government’s HomeBuy Initiative, which is set to start rolling next year. One section of the scheme – Open Market HomeBuy – allows key workers, who live and work in areas where property prices are high, to apply for an interest-free loan. This can be up to 25 per cent of the value of the property. As is the case with shared ownership, this loan can be from a housing association but there is also a possibility of lenders and even developers getting on board too. “This is something that the Ipswich is watching carefully and will be looking to get involved with,” says Winter.

Although the loan is interest-free, when you come to sell the property any profit will be redistributed in equal proportions, which is how the other party will make its profit. Unlike shared ownership, any home on the open market is up for grabs. But you will have to be on your guard as funds will be limited.


7. Guarantor mortgages

But help from closer to home is always preferable – not to mention, cheaper. These days, due to the shortfall between income multiples and house prices, many lenders are offering a ‘guarantor facility’ on their standard mortgage ranges. This means that your parent can guarantee the difference between your maximum borrowing capacity and the mortgage you need. For example, you might earn £20,000 and therefore qualify for a loan of £70,000 (3.5 times salary). If the mortgage you need is £100,000 your parent can act as guarantor for the £30,000 shortfall.

Some lenders take the approach of actually building the parents income into the affordability stakes. Norwich & Peterborough Building Society for example has recently launched a mortgage called Lend A Hand. “The child must be able to support a minimum of 75 per cent of the required loan based on N&P’s lending criteria,” explains Gary Lacey, product manager for the lender. “Then, one times the parent’s income can be used to cover the remainder.”

Guarantor mortgages offer a distinct advantage to simply buying a house with your parents. Although their names will have to appear on the mortgage agreement – which means that, together with you, they will be jointly and severally liable for the loan – they will not feature on the property’s title deeds. This means avoiding Capital Gains Tax (payable on property owned in addition to your main residence) when you come to sell.

8. Family offset mortgages

If your parents – who may have spent years paying off their mortgage – do not take too kindly to the idea of being liable for another loan, there are other ways that they can help, such as a family offset mortgage.

This mortgage won’t help with initial affordability problems but it will allow reduce your overall mortgage debt once you’ve made it onto the ladder. This is because your parents can use their savings to offset against your debt. So if your outstanding mortgage is £120,000 and your parents have savings of £40,000, you only pay interest on a sum of £80,000.

Although this entails your parents having to sacrifice any interest that would be paid on their savings, one silver lining is that they avoid the tax payable on this interest. But the biggest benefit is the interest you are saving on your mortgage debt. You can also assure your parents that their savings can be accessed at any time.

Newcastle Building Society’s offers a family offset and is unusual in the fact that it allows any number of blood relatives to link their savings to your mortgage debt.


9. Buying with a friend or two

Buying with a friend could double your affordability and halve your costs. And an increasing number of lenders will now accept two or more friends on the same mortgage agreement – Halifax allows four.

But if you are not contributing equally, for example one of you pays more in monthly repayments or stumps up more for the deposit, ask your solicitor to reflect this is a Deed of Trust. “Make sure you are also recorded as Tenants in Common,” advises Paul Fincham from the Halifax. This prevents your share of the house from automatically going to the others in the event of your death. He adds: “And keep in mind that this time of life is often quite transient – it’s not out of the question that one of you will marry or move away for a job so think what will happen in these circumstances.”

10. Keeping an eye on government starter homes

If the house was cheap enough you could buy it yourself. Finally then, keep an eye out for the results of the government’s ‘£60,000 house’ project. Unfortunately, this is how much the houses will cost to build – not to buy. But as cut-cost materials will be used and homes will be built on brownfield government-owned land, they will be sold at a significant discount. The building of the first site – Oxley Park, in Milton Keynes – is to get underway in spring next year. Further properties should be ready by the end of 2006.


This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd


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