It’s only recently that I have had the pleasure of calling myself a homeowner, until then I’d been perpetually renting – watching the vast majority of my earnings get sent to my landlord every month and living under the impression that getting myself on the first rung of the property ladder was almost completely out of reach.
For me things changed when my Grandad sadly passed away and the proceeds from the sale of his home were enough to allow me to put down a deposit on a mortgage, but looking back I wish I had been aware of some of the lesser known options available to first time buyers that could have helped me get onto the property ladder a little bit sooner.
In this article we delve into the various options available, some of which you may not be aware of, which will hopefully provide some insight and help to put the dream of home ownership within your reach.
The Challenges Presented To First Time Buyers
It’s true that today’s first time buyers face many hurdles to get onto the property ladder – rising house prices combined with lenders tightening up their affordability models after the introduction of the Mortgage Market Review in 2014, means less people will be able to borrow what they need to in order to buy their own home. This can be especially frustrating when the cost of servicing a mortgage can often be lower than renting the same property.
Saving for a deposit is also a major part of the problem – it is estimated that your average twenty-something renting in London will have paid out over £100,000 in rent before they reach the age of 30. This outlay on rent (combined with living costs) can prohibit young people’s ability to build up the levels of savings required for a deposit, which currently stands at just over £33,000.
The Institute of Fiscal Studies show that since 1993 the level of home ownership amongst Britons aged 20-29 has reduced from 50% to just 20%. The average age of a first time buyers is now 30 years old, which can in part be attributed to our changing attitudes to renting. However the biggest challenge facing first time buyers is house prices which are rising at a much faster rate than salaries. This unaffordability has led to what has been termed ‘Generation Rent’.
The cost of the average UK home has grown rapidly from £38,467 in 1986 to £232,530 in 2017 – that’s a massive 504% rise in 31 years!
In 2003 homeownership levels were at 71%. These have fallen dramatically, down to just 63% in 2017 as recorded in the latest English Housing Survey. Currently, 5.4m households are rented accommodation compared to 2.3m back in 2001 and this figure is predicted to reach 7.2m by 2025.
How To Get On The Housing Ladder?
In recent years there have been some positives for first time buyers. The removal of the need to pay Stamp Duty Land Tax for properties priced up to £300,000 has helped significantly reduce the amount first time buyers need to save for their first property purchase.
The country’s economic uncertainty has led to the subdued housing market we see today, but the upside is that falling house prices will help first time buyers in the short term. Increased taxation on Landlords introduced by the Government have also seen mortgage approvals for buy-to-let purchases come down 14% compared to a year ago and down 53% compared to 3 years ago – leaving more room in the market for first time buyers to purchase properties that for many years have been the staple of investors.
Below we list the options available.
Option 1: Save A Deposit
We know the pressures of paying the bills each month and paying out a sizeable chunk of your income on rent might make saving for a deposit seem impossible, but we are going to provide some sums below to demonstrate that it’s actually fairly feasible to save for your first home. It’s also not uncommon for people to move back in with their parents while they save their deposit – which in this example we have illustrated as £10,000.
The first assumption we are going to make is that you are a couple with two full-time incomes. The Office Of National Statistics (ONS) quote the average UK wage in 2017 was £27,271. For this example we are going to assume that each of you earns £23,000 (a few thousand lower than the national average). So between you both, the household income is £46,000.
Borrowing To Fund Your Purchase
Most lenders, depending on circumstances will allow you to borrow 4 1/2 times your salary. We’ve stated that as a couple your earnings are £46,000 so x 4 = £184,000. Whatever savings you have will form your deposit, but for ease, let’s say you’ve saved £10,000. Therefore your total budget is going to be £194,000.
As a rough estimate, the monthly repayment on £184,000 is likely to be £755 pcm.
What To Buy
Next let’s take a look at typical first time buyer properties. Rightmove have a good selection of 1 and 2 bedroom apartments for sale around the Guildford area for £200,000 and with a bit of negotiation, it’s not unreasonable to agree a price within your budget of £194,000.
Earnings: £46,000 (combined)
Purchase: 1-2 Bedroom Apartment circa £194,000
Mortgage Borrowing: £184,000
Monthly Repayment: £770 pcm
We of course acknowledge that this process will be entirely different if you are single as the amount lenders will allow you to borrow will be significantly lower, but that doesn’t stop anyone from buying with a friend or relative should they choose.
Option 2: Help To Buy
Help to Buy is the name of the Government programme that was introduced in 2013 with the aim of helping first time buyers onto the property ladder. Since its launch the Government has provided £7.39bn worth of funding to assist more than 145,000 buyers to purchase their own homes, 81% of these being First Time Buyers.
Here’s how it works:
- Available for newly built properties priced up to £600,000
- Buyers need savings equal to 5% of the purchase price.
- The Government then provides an interest-free loan for the first 5 years up to 20% of the value of the property (40% in London).
- A mortgage is taken out for the remaining 75% of the value of the property (remaining 55% in London).
As a buyer, it means you now need to borrow a much lower amount than before. Assuming you have a 5% deposit (£10,000 on a £200,000 purchase price) the fact that you now only need to borrow 75% of the mortgage compared to 95% without Help to Buy means you will get a much better interest rate and it becomes much more accessible to those on lower incomes.
Help to Buy isn’t necessarily restricted to first time buyers – existing homeowners can also benefit if the new build property you are purchasing under the scheme is your only residence and as long as you are not entering the scheme with the aim of renting it out in the future.
After the five year interest-free period has ended, the loan has to be repaid or interest is charged at 1% over Retail Price Index (RPI) – currently this is calculated at 1.75%. Alternatively, if you have saved or re-mortgaged you can pay the loan off, based upon the percentage borrowed of the current market value.
Help to Buy in its current form is due to run until the end of March 2021 by which date completion on your new home purchase must have taken place. After this date the Help to Buy scheme will only be available to First Time Buyers and will be capped at a purchase price of £437,600 in the south east of England and £600,000 in the London area.
Help to Buy ISA:
If you are saving to buy your first home, save money by paying into a Help to Buy: ISA and the Government will boost your savings by 25%. So, for every £200 you save, you will receive a Government bonus of £50.
The minimum Government bonus is £400, meaning that you need to have saved at least £1,600 into your Help to Buy: ISA before you can claim your bonus. The maximum Government bonus you can receive is £3,000 – to receive that, you need to have saved £12,000.
The Help to Buy website advises that when you are close to buying your first home, you will need to instruct your solicitor or conveyancer to apply for your Government bonus. Once they receive the Government bonus, it will be added to the money you are putting towards your first home. The bonus must be included with the funds consolidated at the completion of the property transaction. The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitor’s, estate agent’s fees or any other indirect costs associated with buying a home.
Earnings: £46,000 (combined)
Purchase: 1-2 Bedroom Apartment circa £200,000
Mortgage Borrowing: £150,000
Monthly Repayment: £530 pcm
Option 3: The Bank Of Mum & Dad
Many first time buyers are turning to the ‘Bank of Mum and Dad’ in order to secure their deposit. Parents now fund a quarter of all property purchases in the UK, making them the 9th biggest ‘lender’ in the country, forking out more than £6.5 billion in 2017 alone.
With the explosion of values in the UK housing market over the past decade it may be possible for parents, or other family members to take advantage of the increased equity in their home to remortgage and raise capital in order to gift this money to their children. With many lenders now allowing people to borrow into their 70’s and some even to the age of 80, it is making it more affordable to take the additional lending.
Equity Release is a method of releasing funds from your main residence. As a parent this could enable you to release equity from your home in order to help your children onto the property ladder.
Given the substantial increase in property values over the last two to three decades, we see a vast number of clients who have significant equity in their homes, but suffer from a reduced income due to increased life expectancy and smaller annual pensions.
It’s no surprise then that Equity Release is one of the fastest growing sectors within the financial services industry. In 2017 £3.06bn was released from properties, according to the Equity Release Council, which represents a £909m rise on 2016’s total and has trebled the total amount lent over the past four years.
Passing on wealth to the next generation using Equity Release also has the potential of reducing or even eliminating Inheritance Tax liability.
The amount of equity that can be released varies depending on the age of the youngest homeowner, but broadly speaking if you are 65, you can release approximately 35% of the value of the property rising to 45% if you are 70. Interest on the loan is not payable on a monthly basis and is ‘rolled up’ to be repaid from the sale of the property in the future. A very important factor in modern-day Equity Release is that the client owns the property in full and continues to benefit from all future capital growth in the value of the property.
At Curchods we have advisors within our Mortgage Services Department who are specifically qualified in Equity Release and fully equipped to help and advise you through the process. So, if you think Equity Release is a route you would like to explore, simply arrange an informal chat by contacting our Mortgage Services Department direct on 01483 479070 or email: email@example.com
Family Linked Mortgages
Lenders are also taking it upon themselves to look at how they currently lend and the innovations that may assist further in this area. For example, there is currently a product available in which the first time buyer takes a mortgage of 90% of the value of the property they are buying and the parent or close relative can take out a mortgage for the remaining 10%, securing this against their own mortgage-free home.
Mum & Dad’s Savings
Another option available could be if mum and dad have savings. They would then be able to place some of their savings into a designated bank account which is then offset against the property and utilised as deposit funds which still continue to earn the interest on this money.
Children Earning Too Little
In some circumstances, it’s not the raising of a deposit that is the issue, but the income needed to repay the loan required, but there are still options available.
A mortgage structured on a Joint Borrow Sole Proprietor basis is becoming more popular. This is where a family member, partner or friend can jointly apply for a mortgage, therefore utilising their additional income thus increasing borrowing, but leaving only the buyer to be named as the legal owner of the property. Or if the buyer wants the ability to use multiple family members income to fund the purchase we are able to secure a mortgage with up to four incomes taken into account for affordability purposes.
There is no doubt that whether you are a homeowner already or someone looking to purchase your first property, enough cannot be said for an independent mortgage broker who has access across the market and can provide a variety of solutions to help fund your next house purchase. This combined with the support and advice of a good estate agent is fundamental to making your experience of the property market a good one.
You don’t have to buy or sell through Curchods to use Curchods Mortgage Services to arrange your mortgage or provide advice on funding your first property purchase. Your home may be repossessed if you do not keep up repayments on your mortgage.