Why there’s still hope for first-time buyers

Soaring house prices have left many first-time buyers struggling to get on the property ladder. 

The cost of the average home has jumped by 10.9 per cent to £242,832 in only 12 months, according to Nationwide. 

It means that even with generous tax breaks and rock-bottom mortgage rates, the reality of home ownership is slipping further out of reach for many would-be buyers.

Challenging: Soaring house prices have left many first-time buyers struggling to get on the property ladder

First-time buyers were behind 56 per cent of house purchases in 2019, according to website Reallymoving. But in 2020 that fell to 51 per cent as those moving up the housing ladder began to dominate the market. 

Experts warn that house prices could climb further this year, even after the stamp duty holiday is phased out from after this month. 

Yet all is not lost, says Mark Harris, chief executive of mortgage broker SPF Private Clients. 

‘There are plenty of schemes and lenders with options available to help people achieve their dream of home ownership,’ he adds. 

Raising a deposit and meeting strict affordability checks are the biggest hurdles for first-time buyers. But a surge in saving over lockdown, as families spent less, has helped many raise chunkier downpayments. 

And with the boom in homeworking, some younger buyers may be able to look beyond costly major cities. 

Here, Money Mail outlines the help on offer for first-time buyers searching for a home of their own.

Small deposit

Before the pandemic, there were dozens of mortgages available for buyers with a 5 per cent deposit. 

But as lenders rushed to reduce risk, so-called 95 per cent loan-to-value (LTV) deals all but disappeared. 

The good news is that the Government has launched a mortgage guarantee scheme to encourage banks and building societies to bring back mortgages for those with smaller deposits and help turn Generation Rent into Generation Buy. 

It means the 95pc loans are essentially state-backed, giving lenders the reassurance to return to the market. And it has had the desired effect. 

The number of loans on offer has risen from just five in March to 174 now, according to Moneyfacts. Major lenders include Barclays, Halifax, NatWest, Santander and Virgin Money. 

Borrowers can apply as normal to a lender of their choosing. But there are restrictions. You cannot use the scheme to buy properties worth more than £600,000, second homes or buyto-let properties. 

Lockdown savings boosted our deposit

James Stanley and Molly Simpson

James Stanley and Molly Simpson

James Stanley, 26, and Molly Simpson, 24, got the keys to their first home in February after years of saving hard for a deposit.  

They managed to save 10 per cent to put down on their £167,000 two-bedroom, semi-detached house in Rotherham, South Yorkshire. 

‘Saving for a deposit has been easier for us than for some, as we’ve stayed living with our parents rent-free,’ says James. 

‘Lockdown meant we didn’t go on any holidays last year or spend much at all on socialising and eating out. 

‘That meant our deposit savings were given a boost and we could start looking for a place to buy.’ 

James, an aircraft engineer, has been fortunate enough to work throughout the pandemic. 

Molly, a leisure centre manager, was furloughed for most of last year and at the time they were applying for their mortgage, which threw up problems.

‘Our first mortgage offer was revoked but our broker at L&C Mortgages found us another lender quickly, which was a huge relief.’ 

Lenders would only take into account 80 per cent of Molly’s usual salary. They took out a loan with Barclays — a five-year fix at 3.48 per cent with a £999 fee, which they added to the loan. 

The monthly repayments are about £625 a month. 

‘That’s probably cheaper than renting in our area,’ adds James. 

‘Though, of course, we’ve put down our deposit and paid for renovations with our savings.’ 

James and Molly have delayed moving in while the house is replastered, painted and a new bathroom put in. 

‘We are moving in sometime this month. We are really excited,’ says James.

And the loan must be a repayment mortgage (paying both the interest and capital) rather than an interest-only mortgage. Interest rates are higher than before the pandemic, with most about 4pc. 

Among the best rates is Nationwide’s two-year fixed deal at 3.69pc with a £999 fee or 3.84pc with no fee. Both come with £500 cashback. 

On a typical £150,000 loan over 25 years, the average monthly repayments would be £766 or £779 — still cheaper than renting for many couples. Some lenders have rules on the type of property you can buy with a 95pc loan. 

Flats, maisonettes or even newbuilds are sometimes excluded. Atom Bank, Nationwide, Santander and TSB will not accept applications for 95pc loans from the self-employed. 

Others, such as Virgin Money, will not lend beyond a 30-year term to those with a 5pc deposit. 

The Government scheme has prompted lenders, including Accord, part of Yorkshire Building Society and Coventry Building Society, to offer their own 95 pc mortgages. Accord, is offering a competitive five-year fix at 3.89pc with a £999 fee. 

But those with small deposits will still need to meet lenders’ strict affordability criteria. Most will lend up to four-and-a-half times your income. 

So if you earn £40,000 a year, for example, you would be able to borrow £180,000 to buy a £189,000 property with a 5pc deposit. 

The bigger the deposit, the cheaper your mortgage rate. So if you are close to raising enough for a 10pc rather than a 5pc deposit, and house prices aren’t running away in your area, it could pay to keep saving. 

Borrowing less might also put you in a better position to meet affordability criteria. The best rates for those with a 10pc deposit include a two-year fix from Halifax at 2.88pc with a £999 fee. On a £150,000 mortgage over 25 years that’s £702 a month, compared with £766 a month on the Nationwide two-year fix at 3.69pc.

Saved more?

Meanwhile, Nationwide’s Helping Hand mortgage will allow applicants to borrow up to 5.5 times their income when applying for a five or ten-year fixed rate deal with a 10pc deposit. 

David Hollingworth, at L&C Mortgages, says: ‘Fixing for longer means the borrower’s payments won’t rise and fall with interest rate movements. That allows the how to Get your house in order lender to be more flexible in the size of mortgage it will offer.’ 

Help to Buy

For buyers with a 5pc deposit who want a new-build, there is help available under the Government’s Help To Buy: Equity Loan scheme. This is now exclusively for first-time buyers, having previously been open to all. 

As before, the Government will lend homebuyers up to 20pc of the cost of a newly built home, and up to 40pc in London. 

However, there are now regional price caps. In the North-East, for example, applicants can only access the scheme for homes worth £186,100 or less. In the South-East the limit is £437,600 and £600,000 in London. 

Support: For buyers with a 5% deposit who want a new-build, there is help available under the Government’s Help To Buy: Equity Loan scheme

Support: For buyers with a 5% deposit who want a new-build, there is help available under the Government’s Help To Buy: Equity Loan scheme

The equity loan is interest-free for the first five years, and has a maximum term of 25 years. After five years, you will be charged 1.75pc interest, which will rise every April in line with inflation as measured by the Consumer Price Index (CPI) plus 2pc. 

The scheme will end in March 2023.

Ask Mum and Dad

Many first-time buyers need help from their parents to scrape together a deposit. 

But there are other ways the Bank of Mum & Dad can help. 

If buyers have friends or family who cannot afford a lump sum but want to help, they could consider the Barclays Springboard mortgage. 

It requires loved ones to place 10pc of the property purchase price in a savings account for five years. 

The buyer could then take out a loan with no deposit at 3.65pc fixed for five years — or 3.45pc if they can raise a 5pc deposit. And the savings would earn interest at 1.61pc, and remain untouched unless the buyer defaults on the mortgage. Lloyds has a similar Lend A Hand mortgage. 

Loved ones contribute a 10 pc deposit for three years for the buyer to get a 100pc mortgage. They will earn 1.65pc interest on their savings and the mortgage rate is 3.25pc fixed for three years, with no fee. 

The idea behind both deals is that over the three or five years, house prices would rise so the lender could use the equity built up in the property as a deposit and release the family’s cash. 

Borrowing hike

If the buyer does not earn enough for a large enough mortgage, a joint home loan with a parent can boost the amount that can be borrowed. 

Some lenders, such as Santander and Skipton Building Society, will allow up to four people to be named on a mortgage application form. 

Santander will take into account 100pc of the higher two salaries and 50pc of the lower two when deciding how much to lend. 

However, being on a mortgage and property deed could mean parents have to pay a 3pc stamp duty surcharge if the house is classed as a second home. It could also trigger a capital gains tax bill if the property is sold in the future. 

This has sparked increased interest in ‘joint borrower sole proprietor’ offerings, where the parent is on the mortgage but not on the deeds, which avoids extra stamp duty or capital gains tax, says Jonathan Harris, managing director of mortgage broker Forensic Property Finance. 

Share ownership

This scheme enables buyers who cannot afford to buy a house outright to purchase between 25pc and 75pc of a property’s value. 

You get a mortgage to cover your share, and any deposit will be small as it is based only on this portion. 

You pay rent on the rest to a housing association. Over time, buyers increase their share until they own all of the home. 

A version of shared ownership is also available from Wayhome, whose Gradual Homeownership scheme requires a 5pc deposit for the home you want. 

You pay rent on the bit of the home you don’t own and can increase your share by up to 5pc each year, reducing the rent due. 

Buyers need a minimum household income of £30,000 before tax, and can typically borrow about three-and-a-half times income. 

Wayhome’s rules stipulate a property must be worth £250,000 to £500,000, with at least two bedrooms, and be located in a quiet urban area. It can’t be a new build, a basement flat, above commercial property or ex-social housing. 

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