Are you ready to buy your first home?

Published by Christine Toner on 16 February 2012.
Last updated on 16 February 2012

house keys

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."

Find the best mortgage for you


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.

75% LTV

Yorkshire BS 3.39% £995 £989*
Cumberland BS 3,53% £299 £1,004*

95% LTV

Cumberland BS 3.65% £199 £1,017*
Monmouthshire BS 5.49% £995 £1,227*

* 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.


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.

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