When one door slams shut, another opens

The flexible mortgage deals offered by some lenders are helping first-time buyers into bricks and mortar
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As first-time buyers struggle to afford a home, lenders are offering more flexible mortgage deals to make the process slightly easier. Below, we run through the main options and the pros and cons associated with each:

As first-time buyers struggle to afford a home, lenders are offering more flexible mortgage deals to make the process slightly easier. Below, we run through the main options and the pros and cons associated with each:

First-time buyer loans

Around 2,000 first-time buyer (FTB) mortgages offer attractive features such as free valuations, cashback on completion and discounted rates, so payments are lower early on when money is tight.

100 per cent mortgages

If you don't have a deposit, all is not lost. Some lenders will let you borrow all of the purchase price via a fixed, capped or discounted deal. The downside is that the interest charged tends to be higher than it would be if you had a deposit. And you will probably have to pay mortgage indemnity guarantee (MIG), an insurance premium that protects the lender against you defaulting on your repayments. MIG can cost a couple of thousand pounds if you borrow more than 90 per cent of the value of the property, but not all lenders charge it, so shop around.

Offset mortgages

These loans allow you to set your savings and current account against your mortgage debt. So if you have a £120,000 mortgage and savings of £20,000, you only pay interest on £100,000. You can also get your hands on your savings when you need them (although this will lead to a rise in the interest you pay on your mortgage).

Family offset mortgages

These work in the same way except that you can also offset your relatives' savings against your mortgage debt. Your relatives must open savings accounts with your mortgage lender and won't earn any interest on these savings.

Many parents, however, prefer a family offset deal to a straight loan to their children because they retain control of their savings at all times and can get their hands on the money if they need it; if they "lend" the cash to you to put down as a deposit, they might never see it again.

Guarantor mortgages

Another way of mum and dad helping out is if they act as your guarantor, agreeing to cover the cost of the mortgage should you default on the monthly repayments. This is particularly handy if your salary isn't high enough to enable you to get a mortgage for the property you want to buy. The lender also takes your parents' income into account when deciding how much to lend you.

As your salary increases, it is possible to take over full responsibility for the mortgage.

The only problem that may arise is if your parents already have a sizeable home loan, as this may affect their ability to cover the cost of your repayments if you get into difficulty. And if they are committed to helping you out, it will restrict their ability to buy a holiday home, should they want to, at some point in the future.

Cashback mortgages

Money is often tight when you buy your first home, which is why some lenders will provide a lump sum of several hundred pounds to get you started. This cash can be spent on whatever you like, but you should expect to pay a higher rate of interest on a cashback mortgage, and watch out for extended redemption penalties if you want to switch loans.

You may be better off opting for a standard mortgage and taking out a cheap personal loan.

Current account loans

These work in a similar way to the offset deal, combining your current account with your mortgage and offsetting any savings against the debt. But the difference is that all your finances are lumped together, rather than kept in separate accounts as with an offset deal.

Interest is calculated daily and is dependent on the net debt/ savings position at the end of the day. Given that the mortgage rate is usually higher than the savings rate, this can lead to significant reductions in interest payments, which means you may be able to pay your mortgage off early.

However, if you are not disciplined, it might be too tempting to keep dipping into money that should be going towards paying off your mortgage.

Droplock mortgages

Fixed-rate deals offer peace of mind but are rarely the cheapest deals available. However, droplock mortgages offer low initial repayments, with the protection of locking into a fixed rate if interest rates start to rise. You can switch to a fix during the initial discount or tracker period without paying any redemption penalties.

Professional mortgages

If you are training to be a lawyer, doctor or accountant, you may be on a low salary at the moment but expect to earn a lot more in the future, once you have qualified.

Professional mortgages take this into account, allowing certain workers to borrow up to the full value of the property at standard rates - in the expectation that their salary will rise over time so they will be able to afford higher repayments. MIG is not charged either.

Rent-a-room mortgages

One way of paying the mortgage is to rent out the spare room. Some lenders take this income into account when calculating how much you can borrow in the first place.

The Inland Revenue lets you charge £4,250 for renting a room in any one year, without having to pay tax on it. And some lenders add this on to your income when working out how much you can borrow.

But it's worth considering how you would manage if you couldn't find a lodger.

Buying with others

You will be able to get a bigger mortgage if you purchase a property with siblings or friends. And there is also a chance that you will be able to raise a bigger deposit between you than you could have achieved on your own.

Typically, up to four people should be able to borrow on one mortgage, but the income multiples vary for each borrower, depending on the lender.

If you do buy with siblings or friends, you will need to ensure that a watertight contract is drawn up detailing each person's contribution to the deposit and mortgage, and what will happen if one person decides to move out.

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