Ignore the doomsayers, first timers, it's easier than you think

New buyers, hit by soaring rents, find more doors open as lenders ease their mortgage criteria
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The Independent Online

News that it is now cheaper to buy rather than rent across 90 per cent of Britain may rub salt into the wounds of many frustrated first-time buyers (FTBs). But are things really as tough as they seem for those wanting to get that first foot on the property ladder?

New figures from property website Zoopla show that falling house prices and a jump in rental demand have meant that the average renter in Britain is currently paying 13 per cent more than the average owner.

Milton Keynes topped the list, with average rents at £760 for two-bed flats – over 39 per cent higher than the cost of owning – meaning that renters are forking out an extra £2,544 per year. In the capital, average rents stand at an eye-watering £2,291 while the average asking price for a two-bedroom flat is £430,608. So renters are paying an extra 28 per cent or £5,964 per year.

"With house prices down, low interest rates and sky-high demand in the private rental sector, buying has never been a better option for those able to secure a mortgage," says Nicholas Leeming from Zoopla.

"And with owners reducing prices further in order to achieve a sale before Christmas, there may well not have been a better time to buy in recent times."

And despite the eurozone crisis and a slowing economy, banks and building societies are turning on the lending taps. Lending was up 6 per cent from July to August, according to the most recent figures from the Council of Mortgage Lenders (CML), representing a 10 per cent increase from August 2010.

New statistics from chartered surveyors e.surv show that lending at high loan-to-values (LTVs) rose to its highest level this year, and buyers with a deposit of 15 per cent or less accounted for more than 10 per cent of total approvals in August. This is still well short of the 22 per cent seen in August 2008, but it is a positive sign that high LTV purchases grew at almost twice the pace of the rest of the market last month.

High LTV lending is still not happening on a large scale, however, so the first step must be to save as much as possible to access the best rates and a wider range of lenders.

"Getting into the discipline of putting an amount aside each month makes sense as otherwise it becomes all too easy to spend it on something else," says David Hollingworth of the mortgage brokers London & Country.

"Nationwide offers first-time buyers who save regularly the chance to apply for a 95 per cent mortgage – they need to save into the Save to Buy regular saver account. Of course, that does not guarantee that they will be accepted, but at least the option is there."

For potential buyers looking for an edge it may be prudent to look at purchasing a home in areas where lenders are more welcoming to young buyers. A new Halifax study says that new buyers stand the best chance of success in the North where the average age of an FTB is significantly lower than the national average of 29.

In fact, there is almost a decade between the average FTB age of 25 in Selby, North Yorkshire, and 34 in Harrow, London. Regional hot spots for young buyers are in the North-east, North-west, Yorkshire and the Humber, Wales and Scotland, all with an average age of 28. Average FTB ages stand at 32 in London and 31 in the South-east.

There are now more mortgage products to choose from than last year, with better rates and at a higher LTV with the number of 90 per cent products rising from 183 a year ago to 228 today, according to financial comparison site Moneyfacts.co.uk. The average rate has fallen from 4.47 per cent last year to 4.04 per cent.

"Lenders have become acclimatised to the post-credit crisis mortgage market, and during the past year a number of lenders have also moved to increase the maximum LTV they will lend," says Michelle Slade of Moneyfacts. "Nearly all the major lenders now have deals available to FTB at 90 per cent LTV."

For FTBs wanting to borrow at 95 per cent LTV or more, most deals are from smaller lenders and require a guarantor to secure the deal.

The lack of competition has also meant that interest rates are still fairly high. The first 100 per cent mortgage, the Family Guarantee Mortgage from Aldermore, is available to FTBs with a relative willing to guarantee 25 per cent of the loan for 10 years, after which the buyer has sole responsibility. This loan is available up to £250,000 for buyers aged 25 and over.

As well as the risk of negative equity if your house price falls when taking on a no-deposit loan, this is an expensive way to buy your home, with a rate of 6.48 per cent fixed for three years compared with rates of 4.69 per cent from Yorkshire Building Society if you have a 10 per cent deposit. A better deal might be the 95 per cent LTV guarantor loan from Bath building society which again asks parents to guarantee but at a more attractive rate of 5.29 per cent.

The Lloyds Lend a Hand Mortgage is another option, requiring only a 5 per cent deposit so that young buyers can borrow at the same rates as a 75 per cent LTV loan on the proviso that their parents keep their own savings – of 20 per cent of the property's value – with Lloyds as collateral.

Buying a home with a friend or family member is another option which allows you to share the initial and ongoing costs of buying a home.

There are specific joint ownership mortgages available such as the Share to Buy mortgage from Britannia building society which allows up to four people to club together with a 10 per cent deposit, but there may be significant drawbacks. If one person defaults, all parties are liable so a transparent relationship is an absolute must. Lawyers will need to draw up a suitable contract detailing how much everyone has paid and how much they own.

There are also specific schemes available to FTBs such as shared ownership which allows borrowers to buy part of the property and pay rent on the remainder. These, however, have their critics who point to complaints from tenants about developers levying expensive service charges and failing to mend repairs.

With shared equity – the basis of the Government's FirstBuy scheme – FTBs own the home so there is no rent to pay. Instead, housebuilders such as Bovis Homes and Barratt Developments can offer loans of up to 20 per cent of the property price, so that buyers need only a 5 per cent deposit to qualify for a 75 per cent mortgage. This shared equity scheme is open to those with a household income under £60,000.

Expert View

David Hollingworth, London & Country

"The biggest tip for any prospective first-time buyer: the bigger the deposit that they can amass the better. It will improve the mortgage rates on offer and broaden the choice of lender. Other potential borrowers will find their way round the deposit requirements with the help of parents. That may be through the gift of a deposit or by providing some kind of guarantee."

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