A recent report suggests that a generation of people will be unable to get onto the housing ladder. Since the credit crunch bit in 2008, lenders have been reluctant to offer the higher LTV mortgages that first-time buyers have traditionally needed, preferring the low risk inherent in mortgages for borrowers who have a reasonable amount of equity already and come with a proven credit record.
Figures from Genworth Financial suggest a fall of 89% in the number of 90% LTV mortgage deals available in 2009, compared with three years earlier.
Hand in hand with lower LTV mortgages comes the need for buyers to provide a larger deposit.
With the average property in England and Wales costing £167,423 in August 2010, according to the Land Registry, and a minimum deposit of at least 10% required, it’s clear that first-time buyers have to accumulate a deposit of at least £16,742, never mind paying all the other costs of a house purchase.
It’s a buyer’s market with interest rates low and no Stamp Duty to be paid for homes below £250,000
With many lenders reserving their best products for those with a deposit of 25%, it’s no wonder that a high proportion of today’s first-time buyers depend on the Bank of Mum and Dad to get a foot on the property ladder.
But all is not entirely lost for first-timers. Indeed, in many ways now is an ideal time to buy. Interest rates are at an all-time low and don’t look set to move any time soon, rents are at an all-time high and property prices look as though they may be slowing down due to high volumes of property coming to the market.
While house prices are in the balance at present and falls are certainly not off the agenda, in the long run a growing population suggests that property will soon be in strong demand again.
A survey by the Council of Mortgage Lenders in September suggests that 85% of the population still aspire to be a property owner within the next decade.
For those who are able to invest, now might be the time to stop paying rent and use the money for mortgage repayments at a time when house prices are stalling but rents are rising.
Another incentive is the government’s initiative to waive Stamp Duty land tax payments for first-time buyers acquiring a property worth under £250,000. In this situation, a first-time buyer who can pull together the minimum deposit to purchase an average priced house could save around £1,674 in tax payments – money that can be used instead to boost the deposit amount.
For those first-time buyers struggling to get a large enough deposit there are still several options. Although the government’s Homebuy Direct scheme is no more, many larger house builders have created their own shared equity schemes.
Typically, these offer between 15% and 25% of the property purchase price as a deferred loan, which becomes repayable when the property is re-sold or after 10 years, whichever is soonest.
An alternative is a shared ownership scheme, where the first-time buyer owns their property jointly with someone else. This could be a friend or parent – though there are possible tax implications here – or a housing association.
In the case of a housing association, the buyer pays the mortgage on their share of the property, plus rent to the housing association, and has the chance to buy extra shares in the property over time.
Mortgages for shared ownership are becoming more widely available, with products offered by Halifax, Nationwide Building Society and Leeds Building Society.
The Bank of Mum and Dad still features heavily in the first-time buyer mortgage world, with a divide between of ’haves’ and ’have nots’ developing. Those whose parents are able to help them with their house purchase can often afford to buy several years before those who have to save up the entire deposit themselves.
House builders are even offering incentives for parents who support their offspring in buying a new home. Persimmon Homes has launched a Parent Payback scheme, whereby parents can contribute up to 20% of the purchase price of one of Persimmon’s new homes and receive 5% interest per annum on this money for two years.
Approaching the issue from a different perspective, some parents are now turning to equity release to provide the funds for their children’s homes, thus providing their offspring with a form of early inheritance and potentially reducing the parents’ liability for inheritance tax in the process.
There are still a few lenders offering up to 90% LTV on mortgages for first-time buyers. At the time of writing, Skipton Building Society is offering three-year fixed rate deals at 90% LTV at 6.59%, while Hinckley & Rugby Building Society will lend up to 90% LTV on a two-year discount of 1.05% off its SVR, giving a current pay rate of 4.59%.
Assuming a borrower can pull together a large enough deposit, there are several lenders that will accept a guarantor if the borrower wants to borrow more than the lender’s usual income multiples will permit, or if the borrower does not fit lending criteria in some other way. These lenders include The Mortgage Works, Skipton and the Halifax.
Another approach is for the guarantor to deposit funds with the lender, for which the guarantor will receive an interest payment. This deposit then means that the borrower qualifies for a more attractive mortgage deal.
While it is not easy being a first-time buyer in the current market, there are still ways to get on the property ladder. Whether the method has to include shared equity schemes, parental donations or builder deposits, other aspects of the marketplace mean potential first-time buyers should not just resign themselves to renting but should leave no stone unturned in their search for the right solution.
It’s a buyer’s market – interest rates are low and for those buying properties worth less than £250,000 there is no Stamp Duty to be paid. So building an armoury of possible solutions for your first-time clients could be the helping hand they need to get on the property ladder.