First Time Home Buyers
You're taking the plunge, so get to know what awaits you!
Getting a foot on the property ladder has become considerably more challenging in recent years. Affordability has become a serious issue. One reason why prices of flats and starter homes are so high is the competing demand from ‘buy-to-let’ investors looking to acquire smaller properties.
But when the lower end of the market stalls, it’s contagious. Chains collapse, and the whole market slows. So it’s in everyone’s best interests to keep things moving.
Affordability
Research shows that the average first-time buyer has an income of around £36,000 and is around 30 years old. Most borrow just over three times their salary. But if you’re a university graduate or a young professional with a job with good prospects, although you don’t earn very much lenders may take your future earnings potential into account, allowing you to borrow more.
To see what sort of property you can afford to buy, the following steps can be a useful guide:
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Calculate how much you can borrow, using an online calculator, which also shows what your monthly repayments will be. See website.
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Add any savings to the amount you can borrow.
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Deduct this total from the purchase price of the property you want, and the purchase fees, and what’s left is the shortfall. The next step is to plug this gap.
Budgeting
Since the demise of 100 per cent (or larger) mortgages, buyers need to come up with a decent-sized deposit. There are several ways you can do this. First, by persuading someone else to write you a big cheque – the ‘beg, borrow or steal’ option is explored below.
Second, sell off some assets. If our lives depended on it, most of us could raise a decent lump of lolly auctioning off lots of unused stuff, or trading down to a greener and cheaper mode of transport.
Third, earn a bit more – perhaps by nagging the boss for a pay rise, or maybe by working in a bar for a couple of evenings a week.
But perhaps the best way of saving for a deposit is to spend a bit less of the money you’ve got.
This means making sacrifices by cutting down on non-essential expenditure. Although the words ‘budgeting’ or ‘economising’ have all the appeal of a dose of 1950s austerity, there are some easy cutbacks you can make that should be fairly painless.
Giving up smoking, cutting down on impulse purchases and takeaways and visiting the pub a little less often may even have the added bonus of seeing you drop a jeans’ size or two. Greater savings can be made by cutting out designer labels, or squeezing more miles out of the old banger (the newer the car the more money thrown away on depreciation).
Above all, getting a financial grip and religiously paying off credit cards each month will avoid being clobbered with expensive interest penalties.
Tell your friends you’re saving for a house, and they may even buy the drinks, especially if you stress you're looking to sculpt a property into your dream home! Keeping a record of where all the money goes each month is a great way to spot where all your hard-earned cash is being wasted.
Renting a room
A lot of first-time buyers manage to afford a larger mortgage by making their new property earn a sizeable chunk of income. For anyone used to sharing rented houses or flats, the idea of taking in a lodger should hold no great horrors.
The attraction of two- or three-bedroom properties is that renting out the spare room can help pay the mortgage. This can make all the difference until you’re in a position to comfortably cover the monthly mortgage payments yourself, perhaps after a year or two of pay rises.
The obvious downside is some loss of privacy, and clearly you’ll need to vet lodgers very carefully.
One major attraction of taking in a lodger is that the income is tax-free. Under the ‘rent a room’ scheme you’re quite legitimately allowed to earn rental income of £4,250 without paying a penny in tax. The only snag is that lenders rarely take this into account when calculating income multiples, but it’s worth mentioning.
Your tenant should pay their share of any resulting increase in Council Tax, which is calculated on the assumption that two adults share a property. So if you’re a one-man-band, by taking in a lodger you could lose your present 25 per cent discount. But if there are two of you already, adding a third person shouldn’t increase the bill.
Lodgers have no legal security of tenure, so giving notice should be straightforward. You don’t need any legal tenancy agreement, but to avoid future disagreements always write down the following key points at the outset, and agree them with your lodger:
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How much rent is due and when it’s to be paid
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When the rent can be increased
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Any inclusive services that are provided (cleaning etc)
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How much notice you need to give to terminate the tenancy
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How the bills are to be shared
Before taking in a lodger, you need to tell your insurers (for both contents and building), and if you live in a flat you must notify the freeholder.
Strictly speaking, it’s also worth checking when you take out a mortgage that the lender is OK about you taking in lodgers, and that they won’t try to use it as an excuse to charge you more for a dearer buy-to-let mortgage.
When it comes to paying the mortgage, every little helps, so there may be other potential sources of income that you can unlock in your property. For example, in town centres, or near stations and airports, consider letting out your garage or driveway for parking.
Owners of properties in the vicinity of world-class sports centres such as The Oval or Wimbledon can earn generous sums letting their homes at peak seasons. Or perhaps the film crew from Midsomer Murders might take a shine to the ‘gritty reality’ of your des res.
Buying with a small deposit
Saving for a deposit makes perfect sense in a falling or static market. But if prices are rising, by waiting a year or more there’s a risk that you’ll be priced out of the market. So if you don’t want to wait too long, there are some possible short cuts, such as buying with friends, that could help make the maths work in your favour (see below).
One problem with only having a small deposit is that you won’t get the best mortgage rate, as lenders will regard you as higher risk. Banks usually find a way to penalise anyone borrowing a high per cent loan, usually by charging higher interest rates. Where lenders impose ‘higher lending fees’, these can add a few thousand pounds to the cost of arranging the loan.
In order to afford the home you really want it can be tempting to use all means possible to make the sums add up. But taking a large cash advance on credit cards has to be about the worst possible way of borrowing money and should be avoided, along with unsecured loans at sky-high rates from loan-shark payday lenders. As a rule, any moneylender advertising on daytime TV should be treated warily.
Pooling your resources
The most cost-effective way of buying is to do it jointly with others. Buying with your partner, or with friends or relatives, immediately gives you access to two lots of savings and therefore a bigger deposit.
With two people, your monthly repayments are cut in half. Although most lenders allow up to four names on a mortgage, the loan itself may only be based on two or three salaries, in which case you won’t be able to borrow much extra even if you move in with a busload of all your mates.
Entering into the biggest financial commitment of your life with a total stranger probably isn’t the ideal arrangement. But if you know some like-minded people, it might be worth considering. Obviously, it’s important to be extra careful when picking your future co-owners, rather than jumping to a decision after a few beers down the pub.
Even if you’re deeply smitten with each other, experience suggests that the best policy is usually to plan for the worst, just in case. In any event it’s sensible to instruct your solicitor to draw up a contract that clearly states who is contributing what to the deposit and the monthly mortgage payments, clarifying each party’s share in the property.
It will also specify what happens if one wants to quit, perhaps giving the others first option to buy them out. This way, if you do end up hating the sight of each other at least this will be one major thing you won’t have to argue about. Legally there are two main ways of buying with others:
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Joint tenants – Married couples, usually buy as joint tenants. This means that if your partner dies, their interest will pass to you (and vice versa).
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Tenants in common – Here each of you has a distinct share in the property, perhaps 50/50 or another combination based on how much each contributed to the deposit or mortgage. If you die, your share goes to your estate rather than to your partner.
Watch out!
Couples who buy a property together can sometimes be a little misty eyed, confident that their relationship will endure forever. But insisting on a clear contract that records each others’ contribution needn’t sink a loving relationship.
In one recent case, because the mortgage had been taken out solely in the boyfriend’s name, when the couple broke up his girlfriend had no claim to the property, even though she had been paying her share of the mortgage to him in cash every month.
Parents
If your friends are a bunch of skint no-hopers, or they’re saving up to travel the world, or are simply not ready for the responsibility of home-ownership, there may be another option closer to home. Parents who have built up a fair amount of equity in their own homes during the course of various property booms may be willing to help.
Parental assistance could take the form of a generous cash sum to use as a deposit. Or perhaps they’d be interested in investing jointly with you, contributing half the mortgage payments, or allowing you to generate income by renting out the spare room.
Even parents who don’t relish direct involvement may be able to help grease the wheels of your mortgage application as guarantors.
Guarantor mortgages
Though not many parents can afford to suddenly stump up tens of thousands in cash towards your deposit, they may actually be able to help swing things without spending a penny, simply by acting as your guarantor.
Here, your parents (or another third party) guarantee that if for some reason you become unable to pay the mortgage in future, they will assume responsibility for paying it.
The attraction of this is that lenders will regard you as much less of a risk, either allowing you to borrow a bigger mortgage than you could on your own, or offering you a more competitive mortgage rate. The reason you can borrow more is because the lender will use the guarantor’s income, rather than yours, when calculating how much they’ll lend you.
So if your Dad earns, say, £55,000 a year, you may be able to borrow up to four times this.
The snag is that the lender will also take your Dad’s monthly outgoings into account, so the amount you can borrow may shrink drastically if he’s already lumbered with a huge mortgage.
It’s important to bear in mind that taking on a far larger loan than you can realistically afford to repay each month isn’t a smart thing to do. If you overstretch yourself and fail to pay, the buck will stop with your guarantor, who won’t exactly be overjoyed at the prospect.
The best arrangement is where the lender only requires that the guarantor covers the shortfall between what you can afford and the full amount of the mortgage.
Normal income multiples should apply – so, for example, if you earn £25,000, which qualifies you for a mortgage of £100,000, but the property costs £185,000, the guarantor only needs cover the shortfall of £85,000.
The guarantor need only be liable for the early years of your mortgage.
Once you’ve clocked up a couple of decent pay rises you can take full responsibility for your own mortgage.
Your parents need to be aware that if they commit themselves to covering your mortgage it could restrict them from obtaining further loans to do something for themselves – such as buying that holiday home in Tuscany. Being a guarantor is a major responsibility, and won’t suit a lot of parents.
There can be dire financial repercussions – suppose, for example, that you lost your job and couldn’t pay the mortgage. Or what if interest rates skyrocket? What started as a safety net could become a millstone that potentially causes a rift in your family, leading to financial stress and ill-health. So it’s important to understand the risks for all concerned.
If things do go wrong, always tell your guarantor as soon as possible so that they have time to prepare. Sit down with them and work out a survival plan. You may be able to get another job within a couple of months, so it needn’t be the end of the world.
The ideal guarantor is someone who has already paid off their mortgage and has a good income. Most guarantors are parents, but a relative or even a close friend may be acceptable, although most lenders require that guarantors are not more than 60 years old, which could rule out elderly relatives.
Although most lenders will consider letting you use a guarantor, they may want a larger deposit – say 25 per cent or more – which could defeat the whole point. Instead you might be better off borrowing the deposit direct from parents and paying it back over several years. Or just use the interest on their savings to assist you.
Family offset mortgages
‘Family offset’ mortgages are similar to the offset mortgages we looked at in the previous chapter, but are particularly useful for first-time buyers. These enable your Mum, Dad, Grandma or other relatives (or friends) to hang on to their precious savings whilst at the same time letting you pay less interest on your mortgage.
For example, they may have a few thousand pounds stashed away in some half-forgotten account earning a minuscule rate of interest. If they don’t need this interest and want to help you buy a property without losing control of their cash, offsetting can be a good idea.
To do this, they must open savings accounts with a lender offering family offset mortgages.
The lender then links their accounts to your mortgage, reducing the interest you’re charged on your monthly mortgage payments. The money stays in their name, so they can still withdraw cash as normal.
The downside, of course, is that they earn no interest on their savings. Also, the interest rates charged by lenders on offset mortgages may be a little on the high side, which could defeat the point of arranging one. Check price-comparison websites and leading mortgage brokers who publish tables of best buys.
Help for first-time buyers
First-time buyers are a special case. Not only do they underpin the rest of the property market, but they are living proof of what politicians like to call ’our home owning democracy’.
Most of us ultimately want the security of home ownership, so what can you do if you find yourself priced out of the market?
Experts routinely advise us not to ‘borrow more than you can afford’, knowing full well that you can’t afford to buy anything without getting mortgaged up to the hilt. Fortunately the plight of the first-time buyer has been recognised, and some assistance is available.
In a shared ownership (s/o) scheme you buy a percentage of a property – anything from 25 per cent to 75 per cent – and pay a subsidised rent on the remainder to a housing association. The percentage that you buy depends on the size of mortgage you can raise. So each month you make a mortgage payment to your lender and pay rent to the HA.
The reason this is affordable is because rents are kept artificially low. Over time you can opt to increase the amount you own by ‘staircasing’ until you eventually own the whole thing. Or instead you can move and sell your share to a new part-owner. Most such schemes are run by Has.
Priority for s/o schemes is generally given to existing public sector tenants, or those on waiting lists, although some existing s/o properties are marketed via estate agents to the general public. To join the waiting list you may need to have lived in the area for at least two years. Up to four people can normally become joint owners, and you need to have a low minimum income.
The first step is to approach local housing associations and complete an application form.
If they decide that you qualify and your application is successful, you can look for a suitable property owned by the HA, apply for a s/o mortgage and continue more or less as you would for a conventional house purchase.
Some schemes, known as DIY s/o, allow you to find a property on the open market that you like the look of, not just ones owned by the HA. Shared ownership properties are initially bought under a 99-year lease until you buy the property outright.
The HA should be able to suggest lenders who offer shared ownership mortgages.
I hope you've been taking notes because we've covered some serious ground here. Time to move on? Yes, we've got lots to cover!