How to overcome the homeownership hurdle
The difficulty first-time buyers experience when trying to get a foot on the housing ladder is well documented. Rapid house price inflation over the past decade has meant many people have had to stretch their budgets to the limit in order to get into the property market.
Government initiatives – like shared ownership schemes – have attempted to help, but one of the biggest boosts for first-time buyers was in 1999 when Northern Rock launched a mortgage that lent up to 125% of a property’s value.
By summer 2007, 125% mortgages were quite common across the marketplace with some first-time buyers relying on these high loan-to-value products to buy a house without the need to save for a deposit.
However, the credit crunch, downfall of Northern Rock and subsequent shake-up of the mortgage market has seen lenders scrabbling to exit the 125% market – in just one week in March five top mortgage lenders pulled their ‘deposit-free’ mortgages. And not long after, lenders offering 100% mortgage also started to scrap their offerings - Abbey was the last lender to allow borrowers loans up to 100% of a property’s value until 7 April when it also made a hasty exit.
Bank of Ireland and Bristol & West continue to offer a 100% deal, but to qualify first-time buyers must get their parents to guarantee their loan. And lenders such as Nationwide, Halifax and Barclays (through Woolwich) will lend mortgages up to 95% of a property’s value, but borrowers will have to pay more for these.
So, the best bet for first-time buyers hoping to get a mortgage is to save for a deposit. Of course, the bigger deposit you have the lower the mortgage rate you have to pay. But, at the very least, first-time buyers will need to save 10% of a property’s value before making an offer.
How much this is depends on the price of the house you want to buy. But the latest figures from Nationwide suggest the average cost of a property in the UK is current £179,110 – meaning a deposit of £17,911 is needed.
Using Moneywise.co.uk’s saving calculator, it’s easy to work out how long it will take to save this amount – but the results might shock you.
If you opt for the discipline of a regular savings account such as Principality’s 7% AER account and set up a monthly direct debit of £500, then it will take you two years seven and a half months to raise the deposit needed.
Of course, if you are savvy you will also save in an ISA alongside a regular account – but even if you opt for Scarborough’s competitive one-year ISA paying 6.3% AER, then you’ll only shave six months off the total time needed to raise your deposit.
Obviously the more you can put away the better – alongside a regular savings account and an ISA you need a standard savings account that offers a good rate of interest and terms that suit your circumstances. You can find the best products with Moneywise.co.uk’s daily saving round-up.
Boost your savings
By cutting back on your day-to-day expenses you will be able to put more of your earnings away in a savings account. Budgeting doesn’t have to mean economy beans and nights in with just a book for company – there are loads of ways you can cut back without feeling like you are depriving yourself.
To find out how much you could save, simply arm yourself with a pen and the latest copy of your bank statement. Once you’ve circled all your essential spending – things like rent, bills and credit card payments – you need to analyse what is left.
You can identify all your spending into three categories:
- Essential spending (things like rent and bills that must be paid each month)
- Semi-essential spending – this is spending that you can’t avoid (for example, food) but can be reduced
- Non-essential spending – clothes you don’t need, that morning coffee or the gym membership you never use.
Your next goal is to cut out all category three spending – and put the money you’ve saved into your savings account.
Secondly, think about how you can reduce the amount of money you spend on category two items. For example, could you be a bit more frugal at the supermarket?
For more ways to budget read our article of detoxing your finances.
Or registered users can download our free guide to saving and budgeting.
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.
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.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
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).