| How to get on the housing ladder |
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| 12 May 2008 | |
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First-time buyers have been stopped in their tracks, as most of the
mortgage deals they have traditionally depended on to buy a home have
been withdrawn as a result of the credit crunch.
Last month saw the last hurrah for loans of 100% of the property’s value. Many lenders have also withdrawn 95% deals – last week, for instance, Woolwich withdrew its remaining 95% loans, so borrowers now need a deposit of at least 10%. The only bit of good news has been that, in many cases, interest rates have been easing – but only for borrowers who can put down a big deposit. So that excludes most first-time buyers. Where, then, can a first-time buyer turn for help? Put down a bigger deposit The obvious answer is to put down as big a deposit as you can, and to look for borrowing beyond your mortgage lender. Finding a deposit elsewhere than your own bank account may mean calling on family to help you find the cash. Otherwise you will just have to wait until you have saved up a bigger deposit yourself. While it may be disappointing to be forced to wait in line, because house prices are now falling in many areas of the country, finding a deposit will probably take less time than you might have thought, as the purchase price of the property you choose may now be less than it would have been a few months ago. Forget about the furnishings It has been customary among several lenders over the past few years to grant a mortgage – or mortgage plus a separate loan – for a sum greater than the value of the property. The bank reckoned on the value of the property rising, and the likelihood of the borrower getting a series of pay rises, to cover its risk. The idea was to allow the borrower to have cash in hand for legal fees, furniture, decorations and alterations and all the other bits and pieces associated with a new home. The credit crunch has put paid to loans like this. So, if you want to get your hands on your dream home, you are probably going to have to live with that nightmare of a kitchen, the old curtains that the previous owner abandoned and some sticks of furniture from a local house clearance for the time being. That’s actually not a bad compromise if it means you can get your own home and do it up in your own time. Guarantor mortgage Guarantor loans that are truly useful to the first-time buyer are thin on the ground because the idea is that they stretch your borrowing ability to the limit. The lender is able to lend you that little bit more because the person who guarantees the mortgage – usually a parent – makes a legal agreement to meet the monthly payments if you fail to do so. This was a helpful strategy when you were bursting all your buttons with a 100% loan, but nowadays you will most likely be asked for a deposit of at least 10% anyway. One of the rare 100% guarantor loans is Bank of Ireland’s, at a very unappealing interest rate of 7.25% If a guarantor mortgage doesn’t work, you could consider some sort of shared ownership deal. Options include: A joint mortgage Here you share the mortgage with either a resident friend or partner, or with a non-resident parent who is helping you out. You should remember that there could be capital gains tax implications for the parent when you eventually come to sell, if the parent already has his or her own home. You will also need to decide when you set up the legal ownership whether it is a joint tenancy, where you own the property together, or a tenancy in common, where each party owns a particular share of the property. The mortgage will probably be offered on the basis of “joint and several liability”, which means that if one party stops paying the other party is liable for all the payments. Parental deposit Generous parents have been known to remortgage their own home or even enter into an equity release scheme to provide the deposit for an offspring’s house purchase. This is a dramatic step and could be expensive. Legal and financial advice should be sought before entering into such an arrangement. Family offset mortgage Parents can also help their children by participating in a “family offset mortgage”, where parental savings and the offspring’s mortgage are held with the same bank or building society and the interest on the savings is credited to the mortgage account. There are tax savings to be made with this arrangement, because no money actually changes hands between parent and child or from bank to parent – so there are no inheritance tax implications or income tax liability on the savings interest added to the mortgage account. However, the scheme only makes monthly payments more affordable and does nothing to ease the problem of raising an initial deposit. Extended term mortgage Instead of taking out a loan for the traditional 25 years, you extend the term over 35 or 40 years. For a capital and interest repayment mortgage the monthly payments will be more affordable – which means you might be able to borrow more – but you would pay a lot more interest overall because you would be paying off the debt for longer. Interest only mortgage Similarly, some lenders will still offer you an interest only mortgage. With this type of loan you are making no provision to pay off the capital. Most lenders will require a higher deposit for an interest only loan in the current climate, because you are not building up equity in your home and house prices can no longer be expected to rise sharply to do the job for you. An interest only loan may be suitable in the short term to make home ownership more affordable, but it is rarely a long-term solution unless you can depend on the capital being repaid in some other way, such as by employment bonuses or an inheritance. Shared ownership With a shared ownership loan, you own part of a property, and the other part is owned by another party – usually a housing association. You take out a mortgage for the part you own and you pay rent to the housing association on the rest. Shared ownership can be an ideal way for those on low incomes to get on to the housing ladder. Properties bought under shared ownership schemes can also save you money in other ways, as they tend to be new or refurbished properties, and in some regeneration areas of the country there is no stamp duty to pay. You may be able to build up your share of the property – known as “staircasing” – and own it outright if you have income to spare. When you want to sell your home you can sell the share you own to another household nominated by your landlord or you can staircase to 100% and sell the property in the normal fashion, unless your agreement says you have to sell it back to the landlord to offer to another person in need of social housing. The main scheme for shared ownership is New Build HomeBuy. Shared equity Shared equity schemes are available to key public sector workers (such as nurses, doctors, teachers, social workers, prison officer, fire officers etc.), social tenants or those on a council waiting list and other priority first-time buyers. With a shared equity scheme, you buy the whole property (there is no one else involved in ownership), but you borrow the money to buy the property in a different way. You borrow part of the value of the property on a conventional mortgage. The rest of the money you need to buy the property comes in the form of “equity loans” – one from the mortgage lender who is already lending you the conventional mortgage and the other from the HomeBuy agent (usually a registered social landlord who helps first time buyers). With an equity loan you not only repay the capital sum that you have borrowed when you come to sell your house or flat, as you do with a normal mortgage, you also give up a proportion of any increase in the value of the property since you bought it to the equity loan lender. Open Market HomeBuy The main shared equity scheme is Open Market HomeBuy, which is open to households earning up £60,000. The two major choices within the scheme are • MyChoice HomeBuy, which provides an equity share of between 15% and 50% of the cost of a property. You pay a fee of 1.75% at the outset on the share you do now own. This annual fee increases each year by inflation plus 1% every year. This scheme allows you to choose to take out your mortgage with any approved high street lender. • Ownhome, provided by Places for People in partnership with Co-operative Bank, charges no interest on the part of the property that you don’t own for the first five years. After that you will have to pay interest at a fixed rate of 1.75% each year. After a further 5 years this increases to a fixed rate of 3.75% a year. Other first-time buyer schemes include: Key Worker HomeBuy in London This scheme is open to key workers in London and grants them an equity loan of up to £50,000 towards the cost of a property found on the open market situated less than 90 minutes’ travelling time from work. Key Worker First Time Buyers’ Initiative The First Time Buyers’ Initiative (FTBI) is a national shared equity scheme run in association with the regeneration scheme English Partnerships. The buyer purchases at least half of the property, with English Partnerships holding the rest. After the buyer has lived in the home for three years, he or she pays a fee to English Partnerships based on a percentage of the equity still held by English Partnerships. You can get more details from http://myftbihome.co.uk/index.html Social HomeBuy UK Under this scheme housing association and local authority tenants can buy a share in their home at a discount, providing the current owner participates in the scheme. Tag this article :     |
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