How first-time buyers can get onto the ladder
Despite the property slump, a first home is still out of financial reach for many people. Rather than rocketing house prices, post-credit crunch first-timers face a different hurdle: the considerably bigger deposit required by mortgage lenders.
According to recent research from Moneyfacts, the average loan to value has fallen from 91% in August 2007 to 74% today. As a result, the average deposit required on a typical first-time buyer loan of £150,000 has soared from £13,500 to £39,000.
But there is a sensible alternative to trying to find a crippling deposit. Government shared-ownership schemes allow you to simply buy a chunk of a property – between 25% and 75% – with the remainder being bought by a local housing association. You’ll still be required to stump up a deposit on the mortgage part of the purchase. In keeping with the wider market, this will be a minimum 10%, with very limited choice at 5%.
You will also have to pay an ‘affordable rent’ on whatever part of the home you don’t own, but the exact amount will depend on the scheme and the value of the property. According to the government’s Homes & Communities Agency (HCA – formerly the Housing Corporation) that funds the schemes, this is no more than 2.75% of the value of the rented part of the home.
For example, on a property worth £150,000, if you buy a 50% stake, then you would have to pay £2,062.50 in annual rent, based on the above rate. Buyers are then given the right (as set down in the property lease) to buy chunks of the part of the home they don’t own from the housing association – a process known as ‘staircasing’.
Shared ownership first made an appearance as a solution to low-cost home ownership back in 1979 but, until a few years ago, had only targeted priority first-time buyers such as key workers. “But now the schemes have been opened up to any buyer who can prove their household income is less than £60,000 and demonstrate that they can’t afford to buy on the open market,” says Jamie Ratcliff, head of intermediate markets at the HCA.
In spite of the housing slump, shared ownership is still a popular means of getting on the property ladder. Moat Housing Association, which offers funding on shared-ownership homes across Kent, Essex and Sussex, saw a record 400 sales between April and June of this year.
Director of sales and marketing, Marilyn DiCara, explains: “Many people, particularly in the South East, still remain priced out of the open market and are looking towards alternatives to fulfil their home ownership dream.”
There are a number of variants on shared-ownership schemes which all come under the government’s general banner of HomeBuy. The most heavily funded is known as New Build HomeBuy which, as it says on the tin, applies to a proportion of all newly built developments in the UK.
Social HomeBuy is another shared-ownership scheme. It allows housing association and local authority tenants to buy their current home at a discount. “Although this comes under the HomeBuy scheme, it’s best regarded as an extension of the Right to Buy, which gives eligible council tenants the right to buy their property from their council at a discount,” says Ratcliff.
Lastly is Rent to HomeBuy. This allows qualifying applicants – again first-time buyers with a household income of less than £60,000 – a 20% reduction on market rent for up to five years. This gives tenants time and opportunity to save for a deposit.
When it comes to stamp duty, if the shared-ownership property is priced above the current minimum £175,000 threshold, buyers have a choice - pay the lot upfront or wait until they own 80% of the property. “The choice will be whether you think the home will have risen in value to the next threshold before then,” says Ratcliff.
If you want to sell your shared-ownership home, you will have to wait for 12 months from the point of purchase. “You will need to offer the share back to the housing association first,” says Ratcliff. “If it fails to find a buyer within eight weeks, you can then sell your share through an estate agent on the open market.”
It’s also worth noting that, even though you won’t own every brick, all repairs and the maintenance of the property will be your responsibility.
When it comes to securing a mortgage for a shared-ownership home, only 15 lenders will play ball, according to moneysupermarket.com. These include Halifax, Abbey, Woolwich, HSBC, and a range of smaller, local building societies.
But the mortgages offered by these lenders will be from their standard range. But Louise Cuming, mortgage expert at moneysupermarket.com, warns: “First-timers will need a 40% deposit of the share of the home they are buying.”
Once you’ve cracked the concept of shared ownership, things get a little trickier. Also under the government’s HomeBuy banner are a number of shared-equity schemes which work slightly differently.
Shared equity is where you take an equity loan on the part of a property you can’t afford to buy, instead of asking the housing association to buy it for you. This loan represents a 30% stake in the property – 15% of which is stumped up by the government and 15% by the relevant property developer. These so-called equity loans are interest-free for the first five years. After that, borrowers will pay a rate of 1.75%, rising annually by 1% each year thereafter.
The remaining 70% is borrowed as a standard mortgage, but offered by just a handful of lenders, including the Halifax and Yorkshire building societies. However, as with shared ownership, mortgage rates are in line with the wider residential mortgage market, and there are not many lenders supporting the scheme.
HomeBuy Direct and Open Market HomeBuy are the two main schemes that work on a shared-equity basis. HomeBuy Direct applies only to the new-build homes that, last year, property developers up and down the country put forward to the government to be part of the scheme.
“The bonus of new-build is that it minimises the hassle and cost of repairs and maintenance for first-time buyers,” says Jamie Ratcliff.
The second shared-equity scheme, Open Market HomeBuy, by virtue of its name, applies to all property on the open market; a buyer sources a home first and then applies for the equity loan.
However, funding has now run out for this scheme (which was split into two sub schemes called MyChoice HomeBuy and Ownhome) and will not be reallocated for 2010, says Ray Boulger, senior technical manager at mortgage broker John Charcol. “Pipeline cases where the applicant already has government funding approved can be processed through to completion, but we are not accepting any new applicants.”
Stamp duty is payable on the whole of a shared equity property upfront and, when it comes to selling, the same percentage of the home you do not own is repaid to the respective lenders. As with the open market, if you are in negative equity, you may not be permitted to sell.
Regardless of whether you are interested in a shared-ownership or shared-equity scheme, your first port of call will be your local HomeBuy Agent – a kind of government broker. Your local agent will then tell you if you’re eligible, as well as what properties are available and where. You can source your nearest HomeBuy at homebuy.co.uk.
Clearly the benefit of both shared ownership and shared equity is that you’re able to take a first step on the property ladder.
The difference between them, as Ratcliff says, is that “although you have the security of owning the whole home with a shared-equity deal, the equity loan is effectively a second-charge mortgage. This means when you want to move, you can’t pay off the standard mortgage without clearing this too.”
Owning just a chunk of a home under a shared-ownership scheme may seem less ambitious, but remember that your right to buy more shares is set down clearly in the lease. But bear in mind that although you don’t need a separate deposit for each chunk you buy, your income may not support the extra borrowing.
How we got on the ladder...
Thirty-year-old Jatinder Banger and his wife, Kiran, 28, bought their first shared-ownership home together in November last year, having become disillusioned with the cost of renting.
“We had been renting a one-bed flat in Guildford, Surrey, for £650 a month, but the landlord told us he was selling, so we needed to move,” says Jatinder, an IT consultant. “We wanted a bigger place and had a look at a two-bed flat in the same block. We liked it, but the rent was £775 a month and the landlord wanted two months’ deposit in advance. This, added to the agency fees, meant shelling out £3,000 before we had even started.”
As luck would have it, the Bangers had registered with Thames Valley Housing Association in April 2008 for a shared-ownership property. Although they had been told that the waiting list was a year, the couple called to enquire and were told they could start looking for a property immediately.
“We found a two-bed flat about five minutes from where we had been living, which was on the market for £247,000. We bought a 25% share of it using a mortgage from Ipswich Building Society. The 5% deposit on that share equated to £3,000 which we would have had to spend anyway by renting.”
Now the Bangers pay £310 a month for their mortgage which, as it is linked to the Bank of England base rate, is currently very low. Rent on the flat which is payable to the housing association is also £310.
“This means that for our two-bed flat which we own a part of, our monthly expenses are less than renting the one-bed flat,” says Jatinder. “Open market rent on our current home would be in the region of £900 a month, so we feel very pleased.” The couple also intend to ‘staircase’ up to a 50% share of the flat as soon as they can afford to.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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%.