- DEPOSIT IS VITAL
The average first-time buyer property has risen in value by nearly 15 per cent in the past five years, while income has increased by only about 4 per cent, according to mortgage lender Halifax. This money gap means patient saving and belt-tightening is a must for most would-be buyers.
Although mortgages are cheaper than ever – some five-year fixed rates are 2 per cent or less – only buyers with a deposit of at least 40 per cent will get bargain deals.
Do not despair. Lenders are still keen to attract first-time buyers and there are 200 home loans that demand a mere 5 per cent down payment.
David Hollingworth, of mortgage broker London & Country, says: ‘The choice for those with small deposits has improved substantially.’
- START SAVING EARLY
First-time buyers now have to save longer to secure a property – many accepting they will need to wait up to five years before making their purchase, according to Halifax.
Most of those looking to accumulate a home deposit should concentrate on cash savings, says Patrick Connolly, of independent financial adviser Chase de Vere.
‘Cash cannot fall in value so a homebuyer knows the money will be there when they need it,’ he says. ‘The best way is to set up a regular direct debit shortly after pay day – with the money going into a cash Isa where interest accumulates free of tax.’
Measly savings rates mean how much is saved – rather than any interest earned – is paramount but it is still important to maximise the interest.
Look for the best cash Isas and savings accounts at comparison services such as moneyfacts.co.uk.
To encourage saving, Nationwide Building Society has a Save to Buy Isa. Would-be homebuyers earn 2 per cent a year interest tax-free if they salt away at least £50 a month for six months – up to a £20,000 maximum. They then become eligible for one of the lender’s fixed rate mortgages and a cashback on completion worth a maximum £1,000.
Nationwide’s offering should not be confused with the new Government-backed Help to Buy Isa, due to launch in the autumn.
- This scheme will work the same as a standard cash Isa but with the added perk that the Government will top up a balance by 25 per cent – up to a maximum £3,000 on £12,000 of savings.
Once the first-time buyer is poised to purchase the property, which must be valued at no more than £450,000 in London or £250,000 elsewhere, the ‘bonus’ will be paid straight to the mortgage lender.
Savers can only salt away up to £200 a month although they are permitted to deposit £1,000 initially. Two people buying together can each take out a plan.
For first-time buyers prepared to bide their time building a deposit, investment funds held inside an Isa become an option – although there are risks involved.
Connolly says: ‘Multi-asset funds are a good choice as they spread risk by investing in different asset classes – bonds, shares and property.’ He suggests funds Schroder Multi Manager and JPM Multi Asset Income and the well diversified global investment trust Witan.
Danny Cox, of fund broker Hargreaves Lansdown, says people looking to build a home deposit should focus on funds that minimise price volatility.
He recommends Newton Real Return which has achieved its aim of producing cash-beating returns over time, while also sheltering investors’ capital during difficult periods.
He also likes multi-asset fund Troy Trojan – with exposure to equities, bonds, commodities and currencies.
- CLEAN UP YOUR CREDIT RECORD
First-time buyers need a good credit record to secure a home loan. Lenders will always make checks with credit reference agencies to see whether would-be borrowers have kept up to date on repaying any debts they have.
Laura Barrett, at credit reference agency Equifax, says: ‘We recommend homebuyers review their credit report before they apply for a mortgage.
‘They should also ensure they are registered on the electoral roll, cancel any credit cards they don’t use and avoid multiple applications for credit.’
Any errors found on a credit report can be corrected, but they can take 28 days to rectify.
- INCENTIVES FROM THE GOVERNMENT
The Government’s Help to Buy schemes – parts one (Equity) and two (Guarantee) – have helped more than 88,000 people buy a new home since their launch in 2013. Part one has been extended to 2020 and part two is likely to be extended until 2017.
EQUITY SCHEME: Under this scheme, borrowers must find a 5 per cent deposit to buy a new-build property. The Government provides a further loan of up to 20 per cent of the purchase price of a home. The loan is interest-free for the first five years.
The borrower must then find a mortgage for the remaining 75 per cent of the purchase price.
Many big-name lenders such as Halifax and Santander and challenger banks, including Aldermore and Virgin Money, offer loans.
Among the best two-year fixed rates on offer are deals from Nationwide (1.79 per cent, with a £999 fee) and Leeds Building Society (2.19 per cent with a £199 fee).
Virgin Money has a five-year fixed rate deal at 2.84 per cent, with a £1,094 fee.
When the five-year interest-free period on the Government loan ends, interest is charged – initially at 1.75 per cent a year.
Any unpaid part of the Government loan must be paid back when the property is sold – with the amount paid based on the percentage that was borrowed at the start, which could be significant if the home has risen sharply in value.
Help To Buy hotspots in the UK are the South East, Scotland and the North West. Details on this scheme are available via developers or builders. Information is also available at helptobuy.org.uk.
GUARANTEE SCHEME: This applies to newly built and existing properties. Here, a borrower puts down a 5 per cent deposit, while the Government agrees to protect lenders if borrowers default on their loans.
- STRETCH THE DEPOSIT
The more you can put down by way of deposit, the more choice you will have in terms of mortgage lender. Hollingworth says: ‘Yorkshire Building Society has a two-year fix at 2.64 per cent for those with a 10 per cent deposit and a fee of £975 – more than one percentage point cheaper than for deals requiring just a 5 per cent deposit.’
EXTRA COSTS SOON STACK UP
Borrowers usually require a deposit of 5 or 10 per cent. On the average first-time buyer home of £140,000 this works out at £7,000 or £14,000.
Stamp duty is charged on all house purchases over £125,000. On a £140,000 property it works out at £300. The Money Advice Service has a calculator at moneyadviceservice.org.uk.
Valuation of the property costs a minimum £150 although many mortgage deals include this for free.
Survey will cost at least £200 for a basic check on the structure of the house.
Legal fees start from £500 and there will be local search fees of at least £250.
Electronic transfer fees will be incurred in moving the mortgage money from your lender to the seller.
Removal costs will be at least £600.
Mortgage fees may set you back several hundred pounds
- SHARED OWNERSHIP
For those who believe buying a first home is too great a financial stretch, a shared ownership scheme may provide a solution. These are offered through housing associations.
Buyers purchase between 25 per cent and 75 per cent of the home’s value and then pay the housing association rent on the rest.
Hollingworth says: ‘This can be a good option for those struggling with affordability issues. It also allows buyers to increase their share of ownership over time and can lead to full ownership if they want.’
Not all lenders offer mortgages for shared ownership, but those that do will include rental costs in their affordability calculations. One of the best deals is from Leeds. It is prepared to lend at 4.99 per cent, fixed for five years. Borrowers need a 5 per cent deposit and pay a fee of £199.
- JOINT MORTGAGES AND GUARANTORS
Clubbing together with friends or family to buy a home is fraught with risks, but some lenders allow as many as four parties on a joint home loan. A parent can even go in with offspring without living in the property.
This allows the parent’s income to be used to boost the borrowing and is now more common than a parent acting as a guarantor, meeting any repayments one of their offspring misses.
With a joint loan, there is a potential capital gains tax liability for the parent as it is not their main residence. Woolwich, a lending arm of Barclays, gets round this by putting the parent’s name on the mortgage but not on the property title.
A parent’s savings can also be used as a quasi-deposit. Some lenders also let parents use spare equity in their home as collateral. Lenders offering these kind of arrangements include Woolwich, Family Building Society and Aldermore.