Are you ready to buy your first home?
A man's home is his castle, so the saying goes, and it has long been the British dream to be a homeowner.
However, in the past few years getting your hands on bricks and mortar has proved difficult, to say the least. Following the credit crunch, lenders became so risk-averse they almost forgot to actually do any lending. As a result, many would-be homeowners have found themselves lining the pockets of landlords for much longer than they planned.
But while getting on the first rung of the property ladder may seem impossible, the dream of owning a property lives on. So what can a potential buyer do to increase their chances of buying their first home? And how can parents and grandparents help?
The most obvious answer is to save.
Today, most lenders require hefty deposits of 10 or 15% of the property value so if you want to buy you need to start putting as much cash aside as you can. "We understand that often people find it difficult to start saving, perhaps due to increased living costs," says Louise Scott, spokesperson for the Yorkshire Building Society.
"But once you get into the routine of saving, even a small amount each month, it can really start to build up and help with a deposit. We would also recommend making the most of ISA limits, as this is a tax-free way to ensure that you keep all of the interest your nest egg earns, ensuring the best return on your savings."
HELPFUL SAVINGS ACCOUNTS
Recognising the need for first-time buyers to build up their savings, some providers have developed regular savings products specifically for potential homeowners. For example, Nationwide's Save to Buy account pays 2.5% and after six months you will be eligible for its 95% loan to value (LTV) mortgages, which otherwise are only available to existing customers. That means you only need to save up a 5% deposit.
If first-time buyers then go on to take out a mortgage with Nationwide, they will also qualify for up to £1,000 cashback. Save to Buy doesn't tie borrowers into taking a mortgage with the society and borrowers can close the account at anytime, without penalty.
Of course, there was a time when deposits weren't so important. Back in the heady days of the early 2000s, pre-credit crunch, a borrower could obtain a loan of 100% of the property's value. Indeed, some lenders (namely Northern Rock) were even offering 110% mortgages. The idea behind such cavalier lending was that house prices would continue their upward climb and once the homeowner came to sell everyone would be a winner.
Unfortunately, things didn't quite pan out that way and as a result lenders decided to be more risk-averse when it came to lending. But, as the market steadily improves, high LTV loans are beginning to make a return. "There are some deals that can offer as much as 95% from lenders such as Skipton Building Society, Cambridge Building Society and Yorkshire Bank," says David Hollingworth, mortgage specialist at London & Country.
"However, the choice improves at 90% LTV where more lenders now have mortgage options. Woolwich and Nationwide are two big lenders to come back recently." But even if there are some good mortgages out there for first-time buyers, you'll only qualify for them if you have a good credit score, and many people don't. Recent research by credit information provider Equifax reveals that one in three applicants for a credit card last year were refused because they had a poor credit rating.
Rate comparison: Is it worth renting for longer to saver a bigger deposit?
95% LTV mortgages may be making a return but is it more cost-effective to save and opt for a lower LTV? We look at the current best-buys for a five year fixed rate.
* Based on a 25-year £200,000 home loan
Source: Moneyfacts, 15 December 2011
Neil Munroe, spokesperson for Equifax, is concerned the same fate could befall first-time mortgage applicants, especially as a third of those who were refused a credit card had no idea why. "It's vital first-time buyers understand what information is used by mortgage providers to assess their creditworthiness, as well as how they can make sure their credit rating is at its best for them to get the most favourable deal," he says.
"Something as simple as the fact that they are not registered on the electoral roll could hamper an individual's ability to gain a good mortgage. Or it might be that a credit agreement they had forgotten about is showing as having an outstanding balance, which could count against their credit score."
Therefore, would-be buyers could improve their credit rating by taking out a credit card and managing it well, ensuring they are registered on the electoral roll and not repeatedly applying for credit when refused. If your credit score is pretty good but you still don't qualify for one of the handful of high LTV products on offer there are other options available.
One option could be a guarantor mortgage. This involves having a parent or relative guarantee to pay your mortgage in the event that you fail to make a repayment. Having a guarantor often enables you to borrow more money than you would otherwise be able.
Another option is a family offset mortgage. Lloyds TSB offers a Lend a Hand mortgage where you only need to provide a 5% deposit as long as a family member puts up 20% of the value. The stake provided by the relative is held in a separate savings account where it earns 3.7% interest. Your relative can get their savings back once you've built up 10% equity in the property.
And of course there are various schemes introduced by the government that can help.
One of which is the Mortgage Indemnity Scheme, where the government will provide guarantees to lenders in order to encourage them to lend. The scheme, which applies to new-builds, will mean first-time buyers will be able to borrow 95% of the property value, with no added risk to the lender as the government acts as guarantor.
FIRST BUY SCHEME
Then there's the First Buy scheme, which is open to those with a household income of less than £60,000 a year. Those who qualify will receive an equity loan of up to 20% of the value of the property, providing they can put down 5%. The loan is jointly funded by the government and house builders. The equity loan is interest-free for the first five years, after which an annual fee of 1.75% will be levied on it. This will rise by the retail prices index (RPI) measure of inflation plus 1% after that. Upon sale of the house, or after 25 years, the homeowner will repay 20% of the value to the loan providers.
The local authority mortgage scheme with Lloyds TSB sees local authorities topping up first-time buyer deposits. Those councils participating will help to fund up to 20% of a first-time buyer's mortgage by placing funds with the lender.
Finally, there is shared ownership where buyers can buy a share of a property, usually 25%, 50% or 75%. The remaining share is owned by a housing association and the buyer pays rent for it. Over time, the buyer can increase the share they own until they own the property outright.
"In some cases, it can be cheaper than if you secured the mortgage outright or had rented," says a spokesperson for Nationwide. Shared ownership schemes tend to appeal to borrowers who expect their income to increase in future as they can purchase additional equity when they can afford to, until they own the property outright. Unfortunately, the properties available are limited.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.