First-Time Buyers

How to finance your property purchase

With the boom in property prices in recent years it has become increasingly difficult for first-time buyers to get on the property ladder and the average age of first-time buyers has increased to 34 (it was 27 less than a decade ago).

Locals in rural areas and towns popular with holiday-homebuyers have been forced to leave their locality in order to buy a home. Many villages are dying (fewer shops, no schools, etc.) as the number of absentee owners has soared in recent years, particularly in coastal villages in the south-west of England. In Wales, where rising prices have caused much resentment against the English, there’s pressure on estate agents and vendors to sell only to Welsh buyers. Many villages and towns popular with retirees are prohibitively expensive (except for well-off pensioners) and in some areas ‘incomers’ (second-homeowners, retirees, investors and job relocators) account for up to 75 per cent of sales and villages resemble ghost towns when all the weekenders are absent.

Financing options

The booming buy-to-let market has also meant that most first-time buyers simply cannot match the prices paid by investors. In autumn 2004, average house prices in the UK were around six times the average household income and even higher in London and the south of England. The average price for a first-time buyer in late-2004 was some £75,000 in the north of England rising to around £250,000 in London. This means that at 3.75 times gross salary, buyers in the north would need to earn £20,000 a year to qualify for a mortgage, while in London it’s a whopping £67,000! Only some 2 per cent of the 3,000 mortgage products available are specifically targeted at first-time buyers.

In the first six months of 2003 the number of first-time buyers fell by over a third compared with the same period a year earlier to around 1,000 per day, the lowest level since records began in 1969 (they fell even lower in 2004). In the late ‘90s first-time buyers comprised around 25 per cent of all buyers, which by 2004 had fallen by half. As a result of the slump in the number of first-time buyers, the market slowed considerably in late 2004 and was threatening to grind to a halt. There are, however, a number of ways that first-time buyers can get a toe-hold on the property ladder:

Some lenders provide special graduate and professional mortgages for young people (with good income prospects) and will lend up to five times their annual salary. Lenders may also waive MIG on graduate mortgages of up to 95 per cent value. There are also special deals for first-time buyers and 100 per cent mortgages are available – some lenders even offer up to 125 per cent mortgages! Graduates and young professionals are also eligible for the Graduate Network scheme backed by the Britannia Building society (www.sharetobuy.com ).

You may be eligible for a self-certification mortgage where you aren’t required to prove your income – these are ideal for the self-employed whose income fluctuates and includes bonuses, commission, etc. Some people lie about their income to qualify for a large (or larger) self-certification mortgage. If you’re tempted to lie you should bear in mind that it’s not only fraud (there are custodial sentences for offenders), but you could easily get into payment difficulties and lose your home!

Pool your resources and buy with relatives or friends – two to four co-buyers can usually afford to buy a home together. (In 2003, the Yorkshire Building Society would lend three times the top co-owner’s income, two times the second and one times the remaining two.) See also the Graduate Network scheme (www.sharetobuy.com ) for young professionals. Co-buyers don’t need to have equal shares and they can be proportionate to the deposit paid and the repayments made. The percentage owned by each co-buyer must be registered on the title deeds and all co-buyers registered as ‘tenants in common’ rather than ‘joint tenants’. You will need a ‘declaration of trust’ so that if one person wants to sell, the others have the option of buying them out – otherwise the property would need to be sold.

Reduce your mortgage payments by taking in a lodger. To ease the cost of a mortgage you can let out a room in your home, which is tax-free provided the rent is no more than £4,250 per annum.

Obtain a guarantor (for example, your parents) who guarantees your mortgage payments. However, this type of mortgage is difficult to obtain and usually requires a deposit of at least 25 per cent, although there are lenders that don’t require such a high mortgage (try Northern Rock or Scottish Widows). Scottish Widows only require parents to guarantee the part of the mortgage that isn’t covered by their child’s income. Parents must usually have at least 30 per cent equity in their own home to act as guarantors and can be released from the arrangement as soon as the mortgage holder is earning enough to take on the loan.

Check whether you’re eligible for shared ownership, as offered by housing associations or trusts. These are non-profit organisations designed to enable those on low incomes (who don’t qualify for council housing) to buy a home, with priority usually being given to key workers such as NHS staff, teachers and those already in local authority housing. Most schemes involve buying a share of a property and paying rent on the rest, with the option of increasing your share later when you can afford it. To find your nearest housing association or trust, contact the Tenant Services Authority (Tel. 020-7292 4400, www.tenantservicesauthority.org/ ), Housing Mobility Exchange (Tel. 020-7963 0200, www.homes.org.uk/HMSinfo.htm ) or your local authority.

The Housing Corporation (see above) operates a ‘starter home’ scheme under which key workers in London can borrow up to 30 per cent of the purchase price of a home up to a maximum of £35,000. A similar scheme in the south-east is operated by Key Homebuy (www.keyhomebuy.com), who will lend up to £50,000. Loans are interest-free and you don’t need to repay them until you sell your home. A new Key Working Living (KWL) scheme was introduced in April 2004 to help key workers in London, the south-east and the east of England to buy, upgrade or rent a home at an affordable price. For information see the Office of the Deputy Prime Minister website (www.opdm.gov.uk and click on ‘housing’).

Self-build shared ownership is a scheme (usually community-led) which involves helping you build your own home. You’re expected to devote around 25 hours a week to the project, usually in the evenings and at weekends; you aren’t, however, required to have any building skills (although they will help!). At the end of the project you will own a percentage of the property and pay rent on the rest, possibly with an option to purchase an additional share with a mortgage. For information, contact the Community Self-Build Agency (Tel. 020-7415 7092, www.communityselfbuildagency.org.uk ) or the Walter Segal Self-Build Trust (Tel. 01892-614300, www.segalselfbuild.co.uk ). Note that self-build shared ownership isn’t for the timid or weak and requires a huge commitment and a lot of work!

Buying a plot of land (and building your own home can also be a relatively inexpensive way to get on the property ladder, depending on where you want to live and what sort of home you wish to build. For example, you can buy a house in kit form or construct an environment-friendly, earth-sheltered home.

Move to an area with lower property prices where you qualify for a mortgage. Buy a property in a less expensive area that you can afford and let it in order to get a toehold on the property ladder. Provided the rent covers the mortgage you will benefit from the capital growth, which could be considerable.

Try to find a developer who will sell you less than 100 per cent of a property, for example in autumn 2004 Bellway Homes allowed buyers to buy 75 per cent. No, you don’t have to share the house with someone! The remainder (e.g. 25 per cent) is payable when you sell the house or when you remortgage. This scheme may become more popular if developers find it increasingly difficult to sell new homes in 2005.

If you’re a first-time buyer you may have to compromise to get on the housing ladder. If you cannot buy what you want in the area you like then you will need to make some concessions — otherwise you may never be able to afford anything!

This article is an extract from Buying, selling & letting property (UK). Click here to get a copy now.

Further reading

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