Where next for first-time buyers?
2008 is certainly shaping up to be an interesting year for first-time buyers. On one hand, the credit crunch seems to be offering some kind of a reprieve for first-time buyers as the price of a home starts to head south. But on the other, mortgage rates have risen, lenders are tightening their criteria and first-time buyers are being forced to put down bigger deposits than in recent years.
And those yet to make the first rung of the housing ladder will be all too aware that falling house prices don't make much difference. In the last decade, the price of an average property has risen by a staggering 294% - from £61,754 to £181,810 - while the cost of a typical first-time buyer home is around £156,636, according to Nationwide.
Even using a mortgage lender that has not tightened up its lending criteria in light of the recent credit crunch, this level of borrowing would require a typical salary of more than £37,000 - and that's with a 5% deposit of £7,800, which at £200 a month would take over three years of saving.
So, if you’re a first-time buyer, what exactly are your options?
Once upon a time, first-time buyers could opt for a mortgage covering 100% or even 125% of the property value. Pre-credit crunch, around 22 high street lenders, including Bank of Scotland and Yorkshire Building Society, offered 100% deals with some like Northern Rock and Alliance & Leicester offering up to 125%.
But all these lenders have now pulled their no-deposit products and you are now required to have a deposit of at least 10% to get a mortgage.
One of the reasons for these products being pulled is fear of negative equity - where the property is worth less than when you bought it. This is now a problem facing many of last year's first-time buyers.
Helen Adams, managing director at first-time buyer website FirstRungNow.co.uk, says: "Negative equity can become a big problem if you want to move or sell but don't have enough money to pay off the mortgage. But if you're staying put there's no reason why it should be a problem, so long as prices bounce back before you want to move on."
The smaller your deposit, the higher the rate is likely to be. Which is why many buyers opt for an interest only mortgage to keep monthly repayments low. This means you just pay back the interest, unlike a repayment mortgage where you pay back both interest and the capital - the amount you actually borrowed.
But this approach to homeownership also comes with a health warning as you've not even started repaying the loan, which can store up problems for the future.
Tim Barton, a partner at estate agents Dreweatt Neate, explains: "Interest-only mortgages have become increasingly popular as they're cheaper than repayment mortgages and property-owners have seen sizeable capital growth recently.
"But in the current property market, an interest-only mortgage will put homeowners at much greater risk of negative equity. Only with a repayment mortgage is the loan being reduced and the amount of equity available in the property increasing, irrespective of growth."
But there are lower-risk alternatives for getting on the property ladder. One is to maximise your borrowing power by putting lenders that employ affordability methods at the top of your list.
These lenders will look at your monthly outgoings to work out what you can afford to repay each month, rather than using income multiples.
In some cases, providing your credit score is good and you have a reasonable deposit, this approach can equate to up to five times your salary, compared to a typical 3.75 or four times with income multiples.
The bonus is that, although your mortgage might be high, you're in a good position to afford it. So if you're debt-free and consider that you could borrowmore in the 'affordability model' stakes, check out lenders that use this method either direct or through a broker.
You could also adopt good-old fashioned compromise. This may mean shifting your focus to a cheaper adjacent area or smaller property, or even giving up on the dream of buying alone and pairing up with a sibling or good friend to share the costs.
If you're a keyworker or are considered a priority first-time buyer, you can share the ownership (and cost) of a property with a housing association under the Government's shared-ownership scheme.
You'll need to be able to buy between 25% and 75% of the home, while the housing association buys the remainder.
You can then 'buy back' chunks - a process known as 'staircasing' - as and when you can afford to. However, these schemes only apply to designated properties.
Available against any property is the Government's HomeBuy scheme - a shared-equity scheme. Visit housingcorp.gov.uk for more details.
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.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
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.
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.