New ways to get on the property ladder
First-time buyers are cannily pooling resources, asking for parental help and using part-buy schemes.
Saturday 27 August 2011
F irst-time buyers Charlotte Thompson and Anna Lucas were both facing a battle to get on to the property ladder when they decided to tackle the problem by pooling their resources and buying a place together.
The close friends used a combination of their savings and help from their families to raise a £23,000 deposit on a £180,000 three-storey townhouse in Cardiff Bay.
"We both knew we couldn't afford it on our own so it made sense to buy with someone who was in a similar position," explains Charlotte, 25. "It has worked out well because although we're easy to live with, we had agreements put down in writing."
These agreements took the form of a declaration of trust – drawn up by their solicitor uncles – that covered issues such as what would happen if one person wanted to sell and how any future profits would be split based on how much each had invested.
"Our biggest worry was that we would fall out over certain issues but that was addressed by the declaration of trust," she adds. "It can be very difficult living with someone so you need to have everything in place and agreed up-front rather than tying up loose ends as you go along."
They then took out a repayment mortgage for £157,000 over 35 years in both their names through the Principality Building Society and are paying £750-a-month.
Charlotte and Anna, 25, set up a joint account into which they both deposit £500-a-month. From time to time they also rent out their spare room which helps them cover the bills.
Their set-up is far from unique these days. Thousands of first-time buyers are being forced to find innovative ways to get on the property ladder as the tightening of the lending criteria in the wake of the global financial crisis makes securing a mortgage akin to mission impossible.
As well as tapping up family members for help in raising a deposit and also combining resources with likeminded individuals, they are also buying run-down properties at auction, striking deals with housing developers and taking advantage of shared equity schemes.
Kate Faulkner, author of property guides for Which? and managing director of designsonproperty.co.uk, has noticed a change in the approach of first-time buyers now they can no longer afford to overstretch themselves.
"They have definitely become more resourceful because they realise they will have to be quite canny about the property they buy and what they pay," she says. "The days of borrowing loads of money are over and that's no bad thing as 100 per cent mortgages were a stupid idea."
This has led to all sorts of arrangements. "People are recognising they can tackle the affordability issue through buying with friends, while shared ownership can be a viable option," she adds. "I also love the fact that families are pitching in together, such as buying properties with an annexe where the parents can live."
So what are the options for first-time buyers – and how do they know what's suitable?
Getting help from family members
There's very little data to go on but anecdotal evidence from mortgage brokers suggests that most first-time buyers needing help to raise the 10 per cent deposit normally demanded by lenders will initially look to family members.
They can also help in other ways, points out David Hollingworth of mortgage broker London & Country, although this will depend on factors such as age and financial situation.
"There are still opportunities for parents to act as guarantor that can mean their child getting a slightly larger mortgage," he says. "However, the parent will have to show they can afford their child's mortgage as well as any other commitments which can be difficult."
Some lenders will agree to lend up to 95 per cent of the property purchase price – as long as they can use some of the equity in the parents' house in the form of a charge. Others will agree to similar arrangements but require the parent to put down 20 per cent into one of their accounts.
Buying with friends
The Housing minister, Grant Shapps, has urged lenders to further embrace the concept of so-called "mates mortgages" so as to enable younger first-time buyers to pool their resources and buy a property between them.
"If there are mates who are perfectly capable of paying monthly mortgage payments, but are struggling to fund a deposit on their own, there should be straightforward options to unit with their friends and take the first step on to the housing ladder together," he said.
Mr Hollingworth believes this route is worth considering and points out that most lenders will allow up to four people on an application, even though approaches will vary between companies with a number of them only taking the two main incomes into account.
"The issue is how you deal with changing circumstances," he points out. "If you've got four young people there's a good chance that the situation of at least one of them will change so it pays to think about how you would deal with that in advance."
It's also worth bearing in mind that the more people wanting to live together the bigger – and more expensive – the property that needs to be bought. Such costs may be prohibitive even when you have a number of people contributing to the deposit.
However, that was the route chosen by three friends – Rhys Cockerall, James Stratford and Rosie Campbell – who had each spent years renting in London before deciding to explore ways that they could get on to the property ladder.
The trio pooled their resources to buy a £397,000 four-bedroom property in Tulse Hill, south London, complete with a garden, and opted for a Britannia mortgage through "Share to Buy", a web-based company that helps graduates and professionals get a foot on the property ladder.
"The process for applying for mortgage with three people was very simple really, much easier than our experience with other banks," explains Mr Cockerall. "We found that the 'Share to Buy' mortgage had a very competitive rate and it was simple with no arrangements fees or overpayment charges, and all round it was really easy to sort out."
You may be able to get financial help to buy a new home through so-called HomeBuy schemes which enable you to purchase a percentage of the property with the plan being that you are eventually able to own it outright when you can afford it.
There are two variations of these schemes – equity loans in which you receive a loan towards the purchase price that has no fees for five years, and shared ownership which enables you to buy a share of your home and pay rent on the remainder.
For example, FirstBuy will see the Government and house builders combine to offer first-timer buyers a 20 per cent equity loan. With a five per cent deposit from the buyer, this will enable them a 75 per cent mortgage to be taken out. Loans will be repaid on resale of the property.
Prospective applicants will need to meet criteria and see what developments are available in their local areas. For example, primary school teacher Lucinda Turner took advantage of a shared ownership scheme after moving to Clapham, south London, with her partner and deciding she'd had enough of giving money to a landlord and wanted a place the couple could call their own.
They approached Notting Hill Home Ownership and bought a 35 per cent share of a two bedroom apartment for £98,000 in The Quadrant development in Stockwell, south London. "London is such an expensive place to live we never thought we'd be able to afford to buy somewhere of our own but we're actually paying less each month than when we were renting," she says. "The fact that we also have the opportunity to one day own 100 per cent of the property is great. It's definitely something to work towards and knowing that we have the option to do that when we can afford to is reassuring."
It might be a struggle for first-time buyers to get on to the ladder but there are certainly options for those willing to do their homework and see what's available. That's what Charlotte Thompson and Anna Lucas did and their decision to pool resources has worked out extremely well.
"It tends to be an incredibly lively and fun house – and one that friends end up staying for a while when they're having problems," adds Charlotte. "We've had people staying who are waiting to buy and others who have broken up with partners. It's even been called the house of healing."
Mortgage affordability improves
* Research published today suggests that things are looking up for potential homeowners with affordability at its most favourable for 12 years, writes Simon Read.
However, as with other housing measures, there's a deep north-south divide – particularly between London and the rest of the country – when it comes to being able to afford a home, according to the Halifax.
If you live in London's Kensington or Chelsea areas, you'll face average mortgage payments on a new loan which will account for 75 per cent of your earnings if you have an average wage.
By contrast, if you live in East Ayrshire in Scotland, typical mortgage payments account for just 17.7 per cent of average local earnings, making buying a home more affordable.
In most south east areas, mortgage payments will eat up half of your pay, while in the north of England and Scotland it's nearer a fifth of average local earnings.
Meanwhile, the property slump in Northern Ireland has meant that while mortgage payments would have accounted for three-quarters of an average salary four years ago, now they eat up just around a quarter.
Across the country, typical mortgage payments for a new borrower – both first-time buyers and home movers – stood at 28 per cent in the second quarter of 2011, the lowest level since 1999. The figure is almost half of the national peak of 48 per cent of average disposable earnings in 2007.
The slump in property prices as well as cheaper borrowing are the main reasons that mortgage affordability is looking so much more positive.
"Lower house prices and reduced mortgage rates have resulted in an improvement in housing affordability since the peak of the housing market in 2007," says Martin Ellis, housing economist at Halifax.
"Housing is now at its most affordable for 12 years, and mortgage payments for a typical new borrower, compared to average earnings, are now comfortably below the long-term average. And with the prospect of continuing low rates for some time yet, affordability is likely to remain favourable."
However, the average deposit put down by home buyers has increased in the last four years from 20 per cent of the property value in 2007 to 25 per cent now. In other words people are needing to take out lower loan-to-value loans, which may account partly for the increased affordability.
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