Charlie Smith is 28 and still living with his parents but he is now ready to move out. He is single and earns £40,000 a year. He wants to buy a property for £148,000 but has no deposit and cannot ask his parents for help. What are his options?
Delia says: With house prices still climbing it is becoming increasingly difficult for people to afford their first homes and they may be living with their parents for longer than desired. To help this client get started in the property market we have Ramona Leavers from All Types of Mortgages and Mary Sung from Mortgage Express. Have you got a problem for Delia? Email firstname.lastname@example.org
Ramona Leavers is marketing and public relations executive at All Types of Mortgages
It is surprising that Charlie has not managed to save for a deposit while living at home as he earns a reasonable income. Of course, 100% mortgages are available but at a cost and borrowers are often penalised for not having to find a deposit in the reversion rate MIG or in the redemption penalties that are charged.
If Charlie is unable to get help from his parents, he has three choices. The first is to consider buying the property with a partner, close friend or relative.
By doing this Charlie would not be restricted to a 100% mortgage and could split the start-up costs of the housebuying process with someone he trusts and feels comfortable moving in with.
Secondly, it might be possible for Charlie to continue living with his parents for a bit longer so that he can try to save up for a deposit on his own.
For a 95% loan on his estimated purchase price of £148,000, he would have to save £7,400 – which could take a while if he is used to spending most of his surplus income on going out.
However, if he is determined to do this, he will have to prioritise and cut back on those little luxuries to which he has become accustomed.
But if Charlie has really come to the end of the road regarding living at his parents' place, the only other option available to him would be to take out a 100% loan. These deals are available through Northern Rock, Mortgage Express and The Royal Bank of Scotland. Northern Rock is able to lend up to 4 x salary.
In Charlie's case this would equate to £160,000, which is £12,000 more than he needs. However, this level of borrowing would be based on affordability and an acceptable credit score.
The Royal Bank of Scotland is able to extend its normal income multiples on its 100% deal from 3.25 x single salary to 5 x salary if the applicant is deemed to be professional – a doctor or an accountant for example. As it is not clear what profession Charlie is in this could conceivably be an option for him.
The most important message here is that someone who has a low cost base at home should be saving a deposit as a much better mortgage deal will eventually be available to them.
Mary Sung is product development manager at Mortgage Express
Charlie's situation is not uncommon. Many first-time buyers are finding it difficult at the moment because of escalating house prices and difficulty in raising a deposit.
Many lenders have acknowledged the problems faced by first-time buyers and have developed products to suit their needs. Charlie might like to consider the 100% graduate and professional mortgages that are currently available.
If he is a key worker he may qualify for one of the government's initiatives such as shared ownership whereby the buyer purchases a proportion of a property and pays rent to a housing association on the remainder.
Without a deposit or assistance from his parents, a straightforward 100% mortgage may be Charlie's best option. Competitive 100% mortgages are available from established lenders such as Northern Rock, The Royal Bank of Scotland and Coventry as well as Mortgage Express. Many come with additional features such as flexible drawdowns, fees-free options and cashbacks which would lower the upfront costs of buying a house.
With interest rates heading north and as a first-time buyer, Charlie should consider fixed rates which would give him payment certainty.
Based on his salary Charlie could borrow £150,000 with Mortgage Express' 100% plus mortgage. This would allow him up to 102% MIG-free. If he borrows the maximum amount he could use the additional funds to cover some other fees such as £1,480 for Stamp Duty.
Charlie should not have many problems buying his chosen property as he has a good income and the cost of the property is within his purchasing capacity, even without a deposit. But as he currently lives with his parents Charlie could bide his time and save for a deposit. If he could save just 5% of the property's value, that £7,400 would give him access to a wider range of products.
But if he does decide to wait, he runs the risk of house price inflation outstripping his rate of saving. This has been an issue since 1996. But with house prices starting to cool this is now less of a risk.
On the other hand, if Charlie is paying his parents rent this might be seen as dead money that could be better used to finance his own mortgage.
Charlie's case shows that prospects for first-timers aren't as bleak as they might appear. With house prices rising at a slower rate and lenders increasing the number of options available, the situation for them is finally improving.