The landscape of lending is changing for people who've been locked out by prices

As the number of new property purchasers falls through the floor, Esther Shaw sees if Government schemes and special mortgages can reinvigorate the housing market
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The Independent Online

here's a first time for everything, so it's said, but try telling that to people who can see the housing ladder being pulled out of their reach.

here's a first time for everything, so it's said, but try telling that to people who can see the housing ladder being pulled out of their reach.

The number of first-time property buyers fell to its lowest level for 20 years last year - no surprise given that homes in 92 per cent of British towns are now unaffordable to those who aren't already invested in bricks and mortar, according to research from the Halifax.

The bank says the average price paid in 2004 by first-timers was £131,024, up 16 per cent from £112,541 in 2003 and helping to push the average age of the new buyer up to 34.

First-timers accounted for less than a third of all new mortgages last year, which poses problems for the property market as a whole because it cannot be sustained over the long term without new blood.

"It's in everybody's interest for these people to be able to get a foot on the housing ladder," says Stuart Bernau from the Nationwide building society. "To keep the market healthy, we need a diverse range of buyers."

With this in mind, the Deputy Prime Minister stepped forward last week and threw a raft of new initiatives into the property sector.

Among these, and as part of the Government's five-year plan for housing, John Prescott proposed that social housing tenants be able to buy a stake in their homes, at a discount, through a "Social Homebuy" scheme. In theory, this will enable them to build up equity in their homes and cash in on rising house prices when they come to sell.

Mr Prescott also announced plans to build 80,000 starter homes on surplus government-owned land. The aim is to sell these properties at around £60,000 each to key workers or those on low incomes.

Social Homebuy is set to be introduced in April 2006 and will run alongside the right-to-buy and shared ownership schemes already being operated by some housing associations.

Right-to-buy lets council or housing association tenants buy their home outright. By contrast, shared ownership allows them to purchase a percentage of the property and rent the rest at a low rate, gradually buying a greater share until they own their home completely.

Alternatively, if you are a worker in essential public services, such as a nurse or teacher, you may be eligible for a loan at a relatively low rate of interest to help you buy a home in the area where you work.

The problem with all these government schemes, though, is eligibility: the criteria are quite strict and tend to revolve around a mix of profession (in the case of key workers), waiting lists and individual income.

For first-time buyers who do not qualify for state-sponsored schemes, lenders are now coming up with innovative solutions. These include specially designed mortgages, a discount in the early years, or a package deal to meet the initial costs - such as legal and valuation fees - involved in buying a home.

"Many lenders will swallow certain costs to make life easier for first-timers," says Melanie Bien, associate director at broker Savills Private Finance. "Or you could opt for a loan that lets you pay only the interest in the first couple of years before reverting to a repayment deal."

For example, with HSBC's HomeStart mortgage, you repay only the interest on your loan for the first three years.

Lenders are also willing to help out young professionals who have the potential to earn more in the future. People in this position may be able to borrow up to four or five times their basic salary; in some cases they won't need a deposit.

Some lenders go further and offer loans of more than 100 per cent of the price, to cover buyers' fees as well as the cost of furnishing your home. Scottish Widows, for example, allows young professionals to borrow up to 110 per cent of the purchase price.

But think carefully before taking out a mortgage that is larger than the property is worth, because you will be in negative equity from the outset and exposed to the vagaries of house prices if you lose your job or have to sell up quickly.

This criticism was levelled at Bradford & Bingley by many industry specialists last week when its lending arm, Mortgage Express, announced its "Max 130" loan. B&B was accused of "irresponsible lending" for allowing homebuyers to borrow 30 per cent more than their property was valued at.

If none of these options seems appropriate, family and friends may be able to help. Buyers with willing parents could consider a guarantor mortgage, as this will enable them to borrow more cash than they could on their own. As the name implies, these loans require parents to guarantee them - stepping in to make repayments if their children are unable to do so.

Another way of enlisting parental help is through family offset schemes, such as those run by the Woolwich and by the Newcastle building society. These allow buyers to reduce the interest on the mortgage by setting it against their family's savings. The upside is that parents can help out their offspring - tax-efficiently - without losing control of their cash.

An alternative approach is to team up with a friend, or friends. More than one in 10 first-timers now use joint ownership to buy their first home, says Helen Adams, director of FirstRungNow, a website aimed at helping potential buyers take their first step.

"The advantage of this is the increased spending power and shared funds to pay for the deposit and stamp duty, as well as legal, survey, valuation and administration costs," she says.

But before making a joint leap on to the property ladder, it is essential to draw up a contract or deed of trust stating what stake you each own in the property and what will happen if someone wants to move on.

Another option if you're a first-timer struggling with cashflow is to purchase a property with a spare room that you can rent out to a lodger to help pay the mortgage. Under current rules, you can earn up to £4,250 a year tax-free in this way.

FAMILY AFFAIR

Michael Pendlebury and his girlfriend Lisa are about to buy their first home together in Salford, Manchester, with the help of a guarantor mortgage.

The couple, both 22, have been living with Michael's parents for the past six months, and are eager to be more independent.

"The house was initially on the market at £128,000," says Michael, a personal tailor. "That was out of our range."

But it was later decided to auction off the property, so the couple put in an offer of £110,000 ahead of auction day - and were accepted.

They have a 10 per cent deposit from their own savings, while Michael's parents are acting as guarantors on a five-year fixed-rate mortgage, arranged through the Skipton building society. Interest is set at 5.29 per cent.

"My parents were willing to help as they know Lisa and I will soon be earning a lot more money than we are at the moment, " Michael adds.

If the couple default, though, his parents will have to cover the monthly cost.

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