In his first days as Prime Minister, Gordon Brown went to great lengths to express the importance that the new government attaches to providing "affordable housing" for first time buyers. He has pledged to build three million extra homes by 2020, but it will be a long time before the benefits of these increased efforts are felt by struggling, and increasingly frustrated homebuyers.
Fewer and fewer people are able to afford their first home, and in many areas of the country there is a steadily growing affordability gap between people's incomes and the price of real estate. Around 90% of British adults wish to own their own home - at present, only 70% are able to do so.
However, help is at hand from many different quarters for the myriad of fraught youngsters looking to secure a footing on the property ladder, as long as they know where and how to look.
Although mortgage providers are quick to up their loan rates following a bump to the Bank of England's headline base rate, they are beginning to provide better options for first time buyers struggling to cope with the costs of homeownership. New deals that offer customers longer repayment periods and higher value loans go some way towards making higher property prices more manageable.
Lately, the government has been encouraging providers to offer first time mortgage seekers longer term fixed interest rate deals as a means of reducing monthly mortgage repayments to more affordable levels. Some providers are slashing fees on their more popular five and ten-year fixed rate deals, however customers should ensure that they are aware of all the extra costs. Early repayment charges (ERCs), for example, penalise those who attempt to pay off their loan at a faster rate or with a lump sum.
Speculation from financial analysts over the future of the Bank of England base rate is currently a bit mixed. While most think rates will continue to rise to at least 6% by the end of the year, many believe that the UK is approaching the top of an interest rate cycle and that rates will start to decline in the next few years.
In the meantime, a long-term fixed rate mortgage will not only protect first time buyers against any immediate fluctuations in interest rates, but also provide them with longer periods in which to pay back the ever increasing sums of money required to buy a house in Britain.
Banks and building societies are also beginning to offer fixed rate mortgages over periods traditionally reserved only for variable rate mortgages. Nationwide, for example, recently released a 25-year fixed deal with a 6.79% rate and £599 worth of fees, for loans up to 95% of the property value. There are currently around 140 fixed rate mortgages on the market which last for ten years or more.
100% plus mortgages
While a long-term mortgage is all very well and good, first time buyers could find they are struggling to save enough money for a deposit and the various costs that come with buying a home. Approximately 11.2 million first time buyers have also admitted to "dipping" into money set aside for a deposit, while one in ten claim to do so at least once a month.
Furthermore, research from Abbey Mortgages reveals that new homebuyers spend an average sum of £16,000 in the first year after a property purchase, on fees charged by lawyers, estate agents, financial advisors, removal firms, stamp duty and bringing their new home up to standard.
It comes as no surprise, therefore, that eight in ten mortgage providers are now offering to lend homebuyers loans with values greater than that of the property that they are purchasing.
Godiva Mortgages, for instance, will allow homeowners to borrow sums of money up to 125% the value of their home. The 125% loan to value (LTV) mortgage is broken down into a 95% secured homeowner loan and an unsecured personal loan of 30% of the property's value. It is important that customers considering such a deal research all charges and stipulations, and don't base their decision squarely on the headline rate of interest. Often providers lending more than 95% LTV will activate higher lending charges
N.B. First time buyers can find mortgage advice and a clear idea of the costs and obligations of a homeowner loan from a mortgage lender or a qualified independent financial advisor.
Help from family and friends
Despite the availability of mortgage options for first time buyers, increasing interest rates coupled with ever steepening house prices mean that many will still need extra help and support, both financially and mentally, when purchasing their first home.
Taking out a loan from the Bank of Mum and Dad
According to the Council of Mortgage Lenders (CML), the trade association for mortgage providers, friends and family have lent more than £2.1 billion to new homeowners over the last decade. In addition to commercial deals, a loan from the 'Bank of Mum and Dad' can provide invaluable help to young homebuyers saving up for a deposit or trying to cope with demanding mortgage repayments.
Although research from Scottish Widows Bank suggests that one in five (18%) parents expect to be reimbursed, the Bank of Mum and Dad offers much more appealing repayment terms than a high street bank. In most cases, no interest is charged and repayment, when it is required, is not usually called for until outstanding commercial debts have been cleared or the property is sold.
Friends and family can also provide financial advice, mortgage tips and support services, such as help with home improvements, baby-sitting, or the odd decent home-cooked meal. These services could add up to make a property in close vicinity to a parent, sibling or close friend a much more financially attractive proposition. It is estimated that six in ten first time buyers are now choosing to live within 20 miles of their family home, with one in seven not so much flying the coop as moving down the road, less than a mile away.
New homebuyers are forced into making many sacrifices to purchase their first property. While some will delay pursuing the career of their choice in order to take advantage of more lucrative job opportunities, others will pass up on or postpone university, further studies and training opportunities, so that they can start saving earlier.
Many will be renting while they look for their first home and attempt to save up for the deposit. It would most likely prove cheaper to move back into the family home. With greater demand from students, single parent families and migrant workers for leased flats and houses, rent prices have skyrocketed in recent years, and can now cost more than monthly mortgage repayments.
While some parents may ask for rent from those moving back home, it is likely that they will ask for far less than a landlord. Savings on rent, utility bills and food costs can be put towards securing a first home. Those paying out a large part of their monthly income on rent should consider that they could make the step up to homeownership without losing much more in the way of disposable monthly income, particularly if they have a bit saved up for a deposit or take out a loan with a high LTV percentage.
Although it can become a risky venture in the event of a falling out, those desperate to make it onto the property ladder could also consider pooling their resources with a friend, spouse, or family member and splitting the cost of a property between them.
If house prices continue to rise as they have been, or if the value of the property is increased with well-executed home improvements, the owners may be able to sell up after a short period and make enough profit to cover the cost of two separate deposits.
The government runs a number of shared ownership and financial assistance plans to help looking to buy their first property make it happen. Some of the more relevant schemes are as follows:
Key Worker Living
Launched in 2004 to replace the Starter Home Initiative, the Key Worker Living scheme was designed to provide financial assistance to certain public sector employees looking to buy a home in London, the South East and the East of England. These regions were identified as the most lacking in affordable housing, making it difficult for the Government to recruit and retain key public sector workers.
Key workers living in one of the above mentioned regions from the following professions can apply for help:
- Teachers in schools, further education and sixth-form colleges
- Nurses and other clinical NHS staff (excluding doctors and dentists)
- Police officers, Community Support Officers, and certain civilian staff employed by the police force
- Firefighters and other uniformed staff below principal level in fire and rescue services
- Prison staff and probation service staff
- Social workers, educational psychologists, occupational therapists, and speech and language therapists employed by local authorities
Eligible key workers could receive help in one of two ways:
- Open Market HomeBuy – Interest free equity loans of up to £50,000 towards a home on the open market. Some schoolteachers in London will be eligible to receive higher-value loans of up to £100,000.
- Shared ownership of new-build properties, where the key worker purchases at least 25% of the home and pays reduced rent on the remaining share.
Social housing tenants of participating landlords, who do not have the 'Right to Buy' their rented property or cannot afford to do so, will be able to purchase a minimum share of 25% of their rented home. The remainder of the equity will be held by the landlord, who will be able to levy a charge of up to 3%. Buyers will receive a discount on their initial share purchase between £9,000 and £16,000, depending on how big the share is, and will be able to purchase further stakes in their home as and when they can afford to do so.
A similar scheme, New Build HomeBuy, allows first time buyers to purchase 25% of a newly built property, while the rest is held in equity by a housing provider until those living in the home can afford to buy further shares.
First Time Buyers Initiative
The First Time Buyers Initiative aims to give more people the opportunity to own their own homes by increasing the supply of affordable housing. Candidates will be identified as eligible and prioritised for assistance within the region by the local Regional Housing Board.
The scheme is being implemented by English Partnerships, the national regeneration agency, and aims to provide financial aid in the form of a shared equity scheme, in which buyers purchase at least half of the property. After living in the home for three years, participants will pay a charge to English Partnerships, based on the amount of equity they do not own.
N.B. Those wishing to find out more about these schemes can do so through the Department of Communities and Local Government.
A look into the future: Up-and-coming areas of tomorrow
One option open to first time buyers with a little bit of savvy is to invest in a property in a cheaper area where house prices are likely to take off in the near future. As with any prediction game, locating tomorrow's property hotspots is not an exact science, but those willing to do a little research could find a worthwhile investment that will allow them to quickly ascend the treacherous property ladder.
According to More Than Home Insurance, Hyndland and Kingston Quay in Glasgow, Childwal and Everton in Liverpool, Holbeck in Leeds, Central Manchester, Ordsall in Salford (Greater Manchester) West Newcastle and several parts of London are among the most promising areas in the country for future price growth.
The insurer identified these hotspots by tracing the movement of young affluent professionals in the belief that large numbers of so-called "Yappies" indicate that an area is set to move up in the world. Yappies were traced by analysing ownership levels of gadgets such as iPods and flat-screen TVs, the use of services such as broadband and Sky Plus, and the frequency of holidays, among other factors.
Ultimately, first time buyers will most likely have difficulty purchasing a property, but making the most of some of the above mentioned options to buy a home in an area that is set for future price growth will ensure that they get the most for their money, and are able to cash-in and move up the ladder as quickly as possible.