2014 saw the number of first time buyers at its highest in seven years, according to the Council of Mortgage Lenders.
Almost 311,500 first time buyers took out a mortgage last year, with lending to this group reaching £45bn. The younger buyers, who had previously disappeared in the first few years following the crisis, are now returning to the market, taking advantage of 5% and 10% mortgages as well as the Government Help to Buy scheme.Can I afford a mortgage?
Mortgage lenders run strict checks on their applicants and will ‘stress test’ your ability to make payments if interest rates rise or your circumstances changed. They will want to look at evidence of your income and your outgoings, as well as any debts you may have, so that they can ensure that you can manage the payments. It’s a good idea to put together a budget before looking for a property, so you don’t end up overstretching your finances.As well as making monthly mortgage payments, there are other costs associated with purchasing a property. You should include the below within your budget
- Mortgage arrangement and valuation fees
- Stamp Duty
- Solicitor’s fees
- Survey cost
- Initial furnishing and decorating costs
- Buildings insurance
I’m struggling to save a 20% deposit - what are the options open to me?
The amount of deposit that you have saved will be integral in helping you work out what kind of mortgage is right for you. Generally, you should look to have at least 5% to 20% of the cost of your home saved. Saving more than 5% will widen the range of mortgages available to you, but we’ll take a look below at some of the options for buyers with a small deposit.Help to Buy
Help to Buy is a government scheme designed to help buyers with a small deposit. As long as you have at least 5%, these schemes might work for you, but it is worth bearing in mind, that although this scheme makes it easier to get started on the property ladder, it can work out more expensive in the long run, compared to a traditional mortgage.
Within the scheme, there are a couple of options, depending on the property that you are looking to purchase. Equity loans are available if you are buying a newly built home, which allows the you to borrow 20% of the purchase price, interest free, for the first five years. In the sixth year, the interest rate will be 1.75% of the loan and from year seven onwards it would be 1.75% +RPI (inflation) +1%. These fees do not go towards paying off the government loan. If you decide to sell your home, or when the mortgage is paid off, you will have to repay the equity loan, plus a share of any increase in value of the property.
Mortgage guarantees are also available as part of the Help to Buy scheme and are open to buyers purchasing new builds and existing properties. The Government provides your mortgage lender with a guarantee for any losses that they may suffer, as a result of any problems you may have in paying your mortgage, with the aim of encouraging lenders to give you a mortgage that only requires a small deposit.. The lender will check you can afford the mortgage payments and you will remain responsible for paying the mortgage in exactly the same way as any other mortgage.Shared Ownership
Shared ownership is where you buy a share of a home from the landlord, usually the council or a housing association and rent the remaining share. You require a mortgage to pay for your share, which can be between a quarter and three quarters of the property value and you then pay a reduced rent on the share that you don’t own. You can also have the option later on to buy a bigger share in the property or buy it outright. These schemes are usually only available if you are purchasing a new build. There is usually eligibility criteria that you will have to meet in order to qualify for a shared ownership scheme, based on your age and occupation, and your combined household income should be under £60,000 (or £80,000 if you are buying in London). However, there are downsides to shared ownership. The rent on the part of the property that you do not own can increase. If you fall behind on your rent, you may be evicted and could possibly lose the money you have already paid for your share. If you want to sell your share, you could be in for a lengthy wait, as demand for secondhand ownership is low and often the sale is dealt with by the housing association. You are also unable to sublet your share until a buyer is found.Guarantor mortgages
If you are struggling to get a mortgage for your first home, you may want to consider a guarantor mortgage. This means that a parent, guardian or close relative agrees to be responsible for the mortgage payments should you be unable to meet them. This should not be entered into lightly as they are legally binding arrangements and your guarantor needs to be able to afford to pay your mortgage should you have problems paying yourself.