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First time buyers
Do it! Jan 2005
First-time buyers – don’t
despair! There could still be options you haven’t considered yet to help you get
on the property ladder.
It’s official. House prices really are falling. The latest Nationwide
Building Society house price index for October revealed the first house price
falls for three years. Prices of the average property fell to £152,159 from
£153,727 in September.
But amid the groans of despair from the nation’s homeowners, a few cheers are
still audible from first time buyers. For the first time in several months, the
number of first-time buyers rose month-on-month in October to 11.42 from 8.9 per
cent in September, according to the National Association of Estate Agents
(NAEA).
So are FTBs in with a chance again?
Well, looking at average house prices doesn’t explain a whole host of other
variables. It seems that the dip in the average house price is largely a result
of a dip – or correction really – in the prices of houses at the more expensive
end of the market, which became over-inflated during the boom.
This means that the types of property that are attractive to first-time buyers,
which are also popular with buy-to-let landlords, are not expected to see much
if any reduction in price.
So, those hanging out for the ‘housing market crash’, as some newspapers have
threatened is looming, might be in for a very long wait.
Other factors keeping the market buoyant include the fact that unemployment is
at record lows, inflation is hovering around a healthy 2 per cent and interest
rates are predicted to have pretty much peaked, which all points towards
sustained if low house price growth in the New Year and beyond.
So, unfortunately, especially for those first-time buyers at the lower end of
the earning scale, affordability remains a hurdle. Colin Dale, head of lending
at Skipton Building Society, says: “The damage has been done. That’s why we are
now seeing the average age of first-timers reaching 28 and 29.”
What to do
But it’s not a lost cause. The good thing is that, in response to a colourful
few years, the
mortgage market is now full of innovative solutions to give even the most
strapped first-time buyers the boost they need. Here are some of the options.
1. Increase the amount you can borrow Lenders will traditionally let you borrow
3.5 times a single or 2.75 times a joint income. But as salaries have failed to
go up in line with house prices, these income multiples are failing to address
the market reality.
Linda Will, managing director of Accord Mortgages, says: “As the base rate has
remained relatively low for a number of years now and house prices have risen,
many lenders are extending the amount you can borrow, by increasing either their
income multiples or their loan-to-value rates (LTVs). At Accord we offer four
times salary to 95 per cent LTV as standard.”
Other lenders will want some kind of security in return for lending more. For
example, HSBC will lend four times a single salary, but only if you have
graduated in the past five years. However, the bank will also lend you 100 per
cent of the property price.
Scottish Widows will lend 102 per cent LTV provided you are a graduate aged 35
or under – the extra two per cent is designed to help with other costs like
legal fees or Stamp Duty. And if you are qualified as one of a list of seven
professions (including a teacher or accountant), Scottish Widows will lend up to
110 per cent LTV at four times salary.
Northern Rock’s Together mortgage will actually lend 125 per cent LTV. Although
this is all payable at the same rate of the mortgage, only 95 per cent of the
loan is secured on the property; the rest is an unsecured loan.
2. Guarantee the shortfall Not all lenders are willing to lend more to respond
to high house prices. One solution, in addition to taking a fixed-rate mortgage
to ensure your monthly payments stay the same, is to ask a family member to
guarantee any shortfall on your income multiple. So if you earn £20,000 a year
(therefore qualifying to borrow £70,000), and the property is worth £100,000,
you would need to get the remaining £30,000 guaranteed. Scottish Widows allows
this on top of the existing perks of its Professional and Graduate mortgages,
and Skipton Building Society will allow a guarantor on all its products.
Alternatively, buying with a friend or two can split the costs while you all
benefit from at least some of the house price growth. Most lenders will now
allow at least three, if not more, names on one mortgage agreement.
3. Eligible for right-to-buy? If you have rented a council property for two
years or more, you could be eligible to buy the house you already live in at a
significant discount. The amount of discount you qualify for increases with the
number of years you have paid rent. The concept of right-to-buy was delivered to
the housing market courtesy of Mrs Thatcher back in 1980 but has undergone a few
changes since then.
Now, if you live in a house, your discount could be between 32 and 60 per cent,
and if you live in a flat, it could be worth 44–70 per cent. But upper limits
have recently been added to all discounts, which vary from area to area. For
example, if you live in the West Midlands, the maximum discount is £26,000, but
if you live in York it is £24,000.
Most lenders provide mortgages for these schemes, but there is a lot of variety
from lender to lender. Most of the big high-street lenders will lend a
percentage of the quoted discounted value which the buyer pays, not the
open-market value, which is far higher. Halifax, for example, will lend up to 97
per cent of this, whereas Nationwide will go up to 100 per cent.
Others, says Bill Warren, compliance director of Complete Mortgage & Loan
Services, will lend on the actual market value, allowing you to free up some
cash; West Bromwich Building Society, for example, will go to 75 per cent.
“Others might go higher, but it is often best organised through a broker,” he
says.
Be warned, however, that right-to-buy schemes are under review all the time.
Check out the website of the Office of the Deputy Prime Minister for the very
latest facts and figures at www.odpm.gov.uk
4. Look into shared-ownership schemes If you do not qualify for right-to-buy,
you may want to look at shared-ownership schemes instead. These allow you to buy
just a share of a property, while a housing association buys the rest. You can
usually buy between 25 and 75 per cent of a property’s market value. You will
then have to pay rent – although this is minimal – on the part of the property
you do not own, alongside your mortgage on the part of the property you do. You
can also increase the proportion you own in the future – a process known as ‘staircasing’
– until it belongs entirely to you.
You can find a list of houses built for this type of purchase from your local
housing association. Log on to www.housingcorp.gov.uk for information on how to
find yours. Lenders that will offer mortgages on these schemes are listed in the
box.
5. Choose an interest-only
mortgage
For first-time buyers
looking to keep initial costs down once on the ladder – especially if getting
there has put you in debt – taking an interest-only mortgage is a temporary
solution. On a £100,000 25-year repayment mortgage (with a 5 per cent interest
rate), you will repay £591 a month whereas on an interest-only basis you would
repay £416. This is not a ‘saving’ as such, as the £175 difference should be put
into an investment vehicle with which you should be able to pay off the capital
at the end of the term. But if you make up these contributions later to cover
the first few years of not paying them, at least you are on the ladder and
taking full advantage of house price growth.
HSBC’s HomeStart Mortgage is designed around this concept. It allows the
borrower to repay only the interest in the first two years, leaving the full
capital repayments to be paid over the remaining 23 years.
6. Prepare for the pinch
Whichever way you get on to the ladder, the additional mortgage costs and
expense of kitting out a new place will always pinch. Be better prepared by
facing up to this fact in advance and start to budget if you can. This should
make your life a lot easier in the long run.
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