First Time Home Buyer Options: A look at some of the available options and possibilities to help First Time Home Buyers get on the property ladder...
First Time Home Buying Guide - Page 9 of 11:
Major difficulties have arisen recently for those trying to get on to the property ladder. House prices in many areas are now well out of reach for the struggling first-time buyer, and it's not just restricted to London and the Home Counties, it even affects areas as far north as Scotland.
However, a degree of help has been forthcoming for the first-time homebuyers with the introduction of a raft of creative and innovative mortgage plans, property sharing, mortgage sharing and government initiatives.
It's estimated that as many as 20% of first time home buyers need help from parents to get onto the property ladder. Other potential buyers are joining forces with friends or colleagues to amass a joint income that is sufficient for a lender to consider providing mortgage funding. Many lenders are introducing specialist mortgage plans to help first time buyers bridge the gap between their income and the cost of their first home.
So let's take a look at the possibilities that may be open to you:
1. Parental Assistance
It's almost a required condition of parenthood these days that they will be expected to have deep pockets not just until their off-spring leave school, or university, but its almost obligatory they should help with a deposit to enable access onto the property ladder! For further reading take a look at our Glossary article 'Borrowing Money from Family'.
2. Joint Mortgage with your Parents
This can be an attractive solution for the first time buyer. It allows a full joint application for the purchase of the property and enables your parents' income (and of course their debts) to be taken into account without the necessity for them to hand over any cash.
Those joining in the application are all joint and severally liable for the mortgage, and will therefore not only be a party to the mortgage, but also the ownership on the title deeds. Thus, if at some future time when your income is sufficient for you to take on the mortgage liability yourself, and your parents sell their share of the property to you, they could be liable to a tax charge under the Capital Gains rules.
3. Guarantor Mortgages
This is a further option for the the first time home buyer that will involve parents again. There are a number of lenders that will consider their conventional schemes to be accessed by first-time buyers on a Guarantor basis. The difference with the Guarantor Mortgage and having a joint mortgage with your parents is that their name will not usually appear on either the mortgage or the deeds, and so no Capital Gains difficulties are likely to ensue.
However, your parents will be separately liable for the entire borrowings in the event of your default in making mortgage payments. As a result, the lender will need to see that your parents' financial position is sufficient to support the mortgage borrowings, usually in full, although some schemes only require the Guarantor to account for the shortfall in the debt. Because of the huge responsibility, it is important that before entering into this type of contractual agreement, that your parents seek independent legal advice.
4. Offset Mortgages - linking to parental savings
This is yet another twist to your parents' involvement with your mortgage arrangements. As you may have already seen on the previous page, the Offset Mortgages is a particularly attractive scheme for those borrowers who may have a fair amount of savings and/or relatively high current account balances.
Some lenders operating Offset Mortgages will allow savings accounts held by parents to offset against the mortgage borrowings of their child. Effectively, any savings linked to the mortgage are treated as an overpayment, and as a result, will reduce the capital on which interest is paid, thus lowering the interest payable and the term of the mortgage.
As many parents have already repaid their own mortgage borrowings, they will usually find themselves paying the Higher Rate Tax charges on their savings. However, provided the parents savings accounts are with the same organisation as the mortgage, they could permit their balances to be off-set, whilst still retaining control over their current accounts and savings at all times.
5. Mates Mortgages (also known as Friends Mortgages or Group Mortgages) - buying with a friend
This option is becoming increasingly popular and involves two or more people joining forces, their resources and income to present a joint application to a lender that will have sufficient income to enable a mortgage to be provided. This has the advantage of getting two (or more) first-time buyers onto the property ladder, in the hope that property prices will increase even further and provide sufficient collateral for each of the borrowers to go their own separate ways at some time in the future. The initial costs of purchase will also be shared, as will the eventual sales costs.
The main downside of this type of arrangement is that all parties must be able to get on, the consequences of major disagreements will inevitably result in a potentially long-term fraught and miserable existence!
6. Graduate or Professional Mortgages
Because many first time buyers are either graduates or professionally qualified, most lenders recognise that your career path will lead to potentially higher earnings, and will take this into account by offering higher income multipliers, and borrowings that could be in excess of 100% loan to value.
7. High Loan-to-Value Mortgages
As you may well have seen in other parts of this First Time Home Buyers Guide, a whole range of innovative products have been introduced into the Mortgage Market Place in recent years, and with their features of lending to borrowers at up to 125% of the property value, together with enhanced income multipliers, especially where the borrower opts for a minimum 5-year fixed rate, this type of scheme has assisted many borrowers who may previously have been excluded from gaining access to the property ladder.
For more information on high loan-to-value mortgage schemes and enhanced income multipliers together with how we can help, please see the following resources from elsewhere on our website.
8. Shared Ownership and Shared Equity Mortgages
These types of arrangements have become increasingly popular in recent years as an option for first time home buyers as conventional property purchase becomes more and more out of reach for the beleaguered first time home buyer! Using one of these schemes will enable you to share the cost of your home with either a mortgage lender, housing association or builder.
In 2005 the Government announced a series of measures to help first-time buyers and key-workers, such as nurses, doctors, teachers, fire fighters, paramedics etc., get onto the property ladder, by creating further Home Ownership Schemes through local authorities and Housing Associations. There are four schemes in the initiative:
- Conventional Shared Ownership
The scheme is designed to assist those borrowers who cannot afford to buy a home on the open market. With this scheme you are able to purchase a 25% share in a property and rent the remainder from a Housing Association. You are entitled to purchase the remainder of the property in blocks of 25% at the market price at the time of purchase.
- DIY Shared Ownership
Local Authorities offer this rent and buy scheme, which allows you to choose a property on the open market, and then buy it on shared ownership terms from a local Housing Association. You pay a mortgage on the share you buy, and rent the remainder from the Housing Association.
- Homebuy
With this scheme, council or housing association tenants are able to borrow 25% of the purchase of a property from a Housing Association, the purchaser then arranges a mortgage of 75%. The 25% loan is repaid on sale of the property.
- Key-Worker Homebuy
This scheme is available to Key-Workers, such as doctors, nurses, teachers, fire fighters etc.) in London, and provides an equity loan of up to £50,000 towards buying a property that meets certain conditions. The loan is repaid on sale.
There are a multiplicity of schemes in this arena, and so for more information on mortgages for shared ownership and shared equity situations, please check out the following pages:
Well we hope that's given you a good idea as to some the choices and options available for first time buyers to get on the property ladder - so don't be despondent if you are a first time buyer, you do have options open to you for achieving homeownership!
Next up we'll take a look at the costs involved with buying your first house.
The costs for a first time home buyer NEXT ›
The overall cost for comparison is 9.8% APR.
The actual rate available will depend upon your circumstances. Ask for a personalised illustration. APR variable and based on a usual case. Most customers are likely to receive a lower rate or the same rate as our overall cost for comparison rate - learn more about APR.
There are no upfront broker fees.
However, a fee may be charged on successful completion. An indication is that on conforming cases (straightforward applications with no or minimal adverse credit) a fee may be charged of up to 1% of the amount advanced, typically £795 and will depend on your circumstances.
For non-conforming cases (where case research and processing may be more complex due to adverse credit or unusual circumstances), a fee may be charged of up to 3% of the amount advanced, typically £1,995.
THINK CAREFULLY BEFORE
SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED
IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Adding existing debt to your mortgage will increase the repayment term and overall cost.
