Rising prices make it difficult enough for first-time buyers to get a foot on the property ladder, particularly in big cities and the South-east. But the situation is even worse for public sector workers, which is why teachers and nurses are moving miles away from where they work because they can't afford anything closer.
The Starter Home Initiative, recently announced by the Government, is designed to address this situation by giving public sector workers a chance to get on the housing ladder. Under the initiative, £250m will be provided over the next three years to help teachers, nurses and those working for the police force to buy their first home. The money will be distributed through shared-ownership schemes or as interest-free loans of up to £10,000. The Government believes this will benefit more than 11,000 key workers.
However, while the move has been well received, some argue that £250m is not enough. "The amount of cash the Government is making available is a helpful start and we welcome the new initiative, but it is not going to tackle the problem entirely," says Dino Patel, London policy officer at the National Housing Federation.
The initiative only applies to those living in certain parts of the country who don't already own a home and are in the first five years of their career.
Dee Borley, director of the Nurseline at the Royal College of Nursing (RCN), says the scheme doesn't really target the right people. The average age of entry to nursing is 26 and rising. Many of these people will already own a house but may not be able to afford to move to more expensive areas.
Ms Borley adds that staff shortages are most acute in London and the South-east, where property prices are highest. Retention of experienced nurses is also a huge problem and the initiative won't help this group because most will have been in the profession for more than five years.
Most of the £250m will be allocated to shared-ownership schemes. These enable people to buy a stake – say 50 per cent – in a housing association property and pay rent on the rest. The owned share of the property can be extended as a person's lifestyle changes and they can afford to take on the extra commitment of a larger mortgage.
This is likely to prove the most popular option for public sector workers as many will find that they are still unable to get a mortgage, even with a £10,000 loan.
The latest figures from Halifax bank show that the average house price is now £94,101, or £169,510 in greater London. The RCN says that a typical salary for an experienced staff nurse in London is about £19,000 a year. And the maximum mortgage a nurse is likely to get on this salary is around £76,000, according to internet mortgage broker Charcolonline. This makes it virtually impossible to buy a property in many areas.
With an increasing number of people struggling to buy their first home – not just those working in the public sector – mortgage lenders are becoming more flexible in their approach to extending credit lines. Whereas traditionally the amount you could borrow was three and a half times your salary, loans of four and a half or five times salary are now available. Even so, you still need a higher-than-average income in order to get on the property ladder in many areas of the country.
So how do you get round this problem and avoid a lifetime of renting or living with parents? Shared-equity schemes are one option. Another alternative is to buy with a sibling or friend.
"A growing number of people are buying together, in numbers of up to four," says Mark Harris, director of mortgage broker Savills Private Finance. However, Mr Harris warns that the more of you there are, the greater the chance of a problem arising. Not only is there the risk that you will fall out among yourselves, but you may want to move at different times. The remaining owners are then left with the problem of having to find the money to buy the others out, and may have to sell their home. This can then leave you back where you started in that you may still not be able to afford a property on your own.
Buying a two-bedroom property and letting a room out to help pay the mortgage is proving an attractive option for many people. But getting that home loan in the first place remains a hurdle, as lenders will disregard rental income when calculating how much you can borrow.
"You can see why lenders don't take rental income into account," says David Hollingworth at mortgage broker London & Country. "There may be times when the room is empty and you therefore have no rental income [and may not be able to afford the repayments on the mortgage]."
A way to get round this is for your parents to act as guarantors, although they can only do this if they are still earning a salary. While the mortgage will be in the child's name, the parents guarantee that they will cover the repayments if their child can't.
If parents are willing to do this, the mortgage is then calculated on their income and not the child's, but they will need to earn enough to cover their own mortgage and outgoings as well as their son or daughter's loan. For this reason, the guarantor route may not be an option for everyone.
Ray Boulger, senior technical manager at mortgage broker Charcol, says an alternative is to buy jointly with the child so that their income is also taken into account.
If any of these options are feasible, there are certain things you should also consider. The larger the deposit you have, the greater the range of mortgage products that will be available to you. And if you can get a deposit of 10 per cent or more, you avoid having to pay the mortgage indemnity guarantee (MIG), which is an insurance policy to protect the lender should you default on your repayments.
The other main consideration is not to overstretch yourself. Although people are borrowing on higher income multiples and interest rates are low, Mr Harris at Savills recommends that your monthly repayments should be no more than about 40 per cent of your net income.
Any more than that, and you could find yourself struggling to afford them.
Contacts: Charcol, 0800 718191; London & Country, 0800 373300; Savills Private Finance, 0870 900 7762.Reuse content