Plenty of hope for first-time buyers, even without Gordon's assistance

David Prosser says the Chancellor's new scheme is not the only way first-timers can get on the property ladder
Click to follow
The Independent Online

Gordon Brown has still not published full details of his plans to help first-time buyers get on the property ladder. But while his new scheme is expected to benefit up to 100,000 buyers over the next five years, those who miss out need to find other ways to cope with soaring house prices.

On Wednesday, the Chancellor confirmed that the Government plans to launch a new shared-ownership scheme, through which buyers will have to raise as little as half the cost of a property. The government and mortgage lenders will fund the rest of the purchase, with the latter charging rent on their share of the property.

"There are still several questions to answer before we can work out who this idea suits," says Ray Boulger, of independent mortgage adviser Charcol. "Lenders will decide who qualifies for the scheme, but will there be restrictions on borrowers who earn more than a certain amount, say, or a maximum property purchase price?"

In any case, the new scheme is unlikely to be launched before next April at the earliest, by which time house prices may have risen even higher.

Simon Tyler, of adviser Chase de Vere Mortgage Management, says: "There is already a huge choice of products to suit many of the circumstances in which first-time buyers might find themselves."

SHARED OWNERSHIP

The Treasury's initiative follows Labour's election manifesto promise to boost existing shared-ownership schemes. The Homebuy scheme already offers cheap deals to key workers in certain areas, including teachers and NHS staff.

In London, for example, Homebuy enables teachers to borrow up to £100,000 to buy a home - the limit in most parts of the country is £50,000. The mortgages are interest-free and borrowers use the money to buy part of their new home. The lender owns the rest of the equity in the property.

When you move, or stop working in a key profession, you have to pay back the percentage of the equity you own. So, for instance, borrow £50,000 to buy 25 per cent of a property that you later sell for £250,000, and you will owe £62,500.

Hundreds of housing associations offer similar deals. They work with a much wider range of borrowers, though you will still have to show you would find it financially difficult to buy without help. In some cases, you will have to be in a certain profession.

Borrowers buy between 25 and 75 per cent of a housing association property and pay rent on the bit that they don't own, usually at a subsidised rate. As your income grows, you may be able to buy further chunks of the property, but profits on a future sale are usually split between you and the association.

Helen Adams, of FirstRungNow.com, a website aimed at first-time buyers, says there are pros and cons. "Check the terms and conditions carefully, especially on what happens when you sell," she says. "Also, many associations are choosy about whom they accept and they may have long waiting lists."

Adams points out that associations offer a limited choice of property, though this is likely to be new or refurbished. But they do offer a genuinely affordable route into housing. See www.housingcorp.gov.uk for details of housing associations in your area, or contact your local authority.

HELP FROM PARENTS

In some cases, children can borrow enough from their parents to get together the deposit for a home purchase. But borrowing from parents will not enable first-time buyers to get a bigger mortgage, so property may still be out of their reach.

In any case, says Duncan Pownall, of Bradford & Bingley: "With many people worrying about their pension, increasing numbers of parents may not be able to sink large sums into their kids' homes."

But he adds: "There are a number of ways parents can help that won't affect their retirement." Most lenders are more flexible about how much they will lend first-time buyers whose mums and dads sign on to the deal as guarantors. But parents usually have to earn incomes sufficient to meet their children's mortgage payments in full, as well as their own, if they have a separate home loan.

However, several products now on offer may be more useful. David Hollingworth, of adviser London & Country Mortgages, says: "Scottish Widows offers a deal where parents only have to guarantee the slice of the mortgage their children would not otherwise be able to raise."

Similarly, Bank of Ireland's FirstStart mortgage offers first-time buyers a loan worth four times parents' income after mortgage payments, plus their own salary. So, while a child earning £20,000 a year might only qualify for an £80,000 mortgage on the basis of their pay, their parents might earn £35,000 and make annual mortgage payments of £3,750. In which case, Bank of Ireland will lend four times' £31,250 plus the child's income of £20,000, a total loan of £145,000.

Some children will be able to afford the repayments themselves, but others will get help from parents or take in a lodger. Either way, the mortgage is secured on the child's income, so the parents' own homes are not at risk.

Another advantage of both the Bank of Ireland and Scottish Widows products is that parents' names do not appear on the deeds of the property.

This is important because where parents are joint owners of their children's homes, they could be charged capital gains tax on any profits made when the property is sold.

Another option for parents is an offset mortgage. Normally, with offset deals, you reduce the size of your mortgage debt - and the interest charges - by pooling it in the same account as your savings. You still have access to the savings, but any money left untouched keeps the mortgage bill down.

Both Woolwich, the lending arm of Barclays Bank, and Newcastle Building Society offer a variation on the offset deal that enables families to put their savings towards reducing the size of children's home loans.

This suits those parents who cannot afford - or do not want - just to give their children money towards their homes.

Hollingworth adds: "This type of arrangement is also reassuring for parents who are worried about giving money to children in case they subsequently split up with their partners - a boyfriend or girlfriend might then walk away with half of the money."

SPECIAL MORTGAGES

Many lenders refuse to lend more than four times your annual salary, even if you can afford the repayments on larger loans.

They also expect you to put down a deposit of at least 5 per cent of the purchase price of the property, especially to get the best-value mortgages.

These restrictions often catch out first-time buyers but there is a wide range of more flexible deals on offer.

NatWest, Northern Rock, Scottish Widows and Bank of Scotland, for example, offer loans of up to five times' salary to many graduate and professional first-time buyers, on the grounds that their pay is likely to increase more quickly than the income of other borrowers.

Most lenders offer 100 per cent mortgages to borrowers who do not have savings for a deposit. But there is often a high-lending charge to pay, of up to 3 or 4 per cent of the mortgage, plus a higher-than-average interest rate.

A handful of lenders offers a better deal. Ray Boulger tips Scottish Widows and Bristol & West, because they offer good interest rates without higher lending fees. He also likes a deal from First Active, priced at the Bank of England's base rate for the next three years, with a high lending fee of just 1 per cent.

Alternatively, Northern Rock, Mortgage Express, owned by Bradford & Bingley, and Coventry Building Society all offer loans of up to 130 per cent of the purchase price of the home. 95 per cent of the loan is secured on the property, while the remainder is an unsecured personal loan.

This kind of deal won't help you afford a more expensive house, but it does enable borrowers to avoid having to raise a deposit, as well as providing spare cash to pay for the costs of buying, such as stamp duty and solicitors' fees.

Paying for this kind of mortgage is a bet on house prices rising over the next couple of years, says Boulger. "If prices do nothing, it might be cheaper to spend two years saving up," he says.

Boulger warns that with all these special mortgage products, first-time buyers must be careful. "Affordability is key," he says. "There's no point getting on the housing ladder if you end up falling off again."

BUYING WITH FRIENDS

Couples have double the financial power of single first-time buyers, but if you don't have a partner, most lenders will consider a mortgage application from two or more friends.

Britannia Building Society even has a special deal aimed at groups of up to four friends, with higher-than-usual income multiples available.

"Buying with friends can work well, but try renting together for six months first, to make sure you're compatible house mates," says Boulger. "You will also need a legal agreement to govern what happens in the future - for example, when one of you wants to move on and sell up."

Hollingworth adds: "Friends will be jointly and severally liable for the mortgage, so if one of you fails to keep up with repayments, everyone else will be liable."

Fixed or variable rate?

* First-time buyers are often particularly likely to be financially stretched by mortgage repayments. Fixed-rate mortgages, which offer certainty about the size of monthly repayments, are therefore worth considering.

* The cost of fixed-rate deals has been falling in recent weeks, with mortgages available at under 5 per cent for terms of up to 10 years.

* Simon Tyler, of Chase de Vere Mortgage Management, advises borrowers to consider high-lending charges as well as interest rates. These fees can cost several thousand pounds. Lenders such as Nationwide Building Society and Cheltenham & Gloucester never charge the fees, Tyler says, though they may offer more expensive interest rates.

* One final option is an interest-only loan, where you pay only the interest each month and no capital. The idea is to make savings into an investment plan to meet the capital repayment when this falls due. But you can keep costs down by making no savings in the first couple of years, and then converting the deal to a capital and interest loan when your income rises.

'I couldn't afford it without support'

Louise Trotman, a 23-year-old human resources administrator, was desperate to get on the property ladder, but when her deal to buy a one-bedroom flat in south London fell through last year, she couldn't see how she would ever be able to buy.

"The flat was actually much smaller than I really wanted, but it was all I could afford, so I was in despair," she says. Then Louise was advised to contact local housing associations. Eventually, after getting in touch with associations all over the London are, she was offered the chance to buy a two-bedroom flat.

Even better, the flat turned out to be in the same block in Brixton as the original property.

"The new flat cost £200,000, which I could never have afforded without support but I managed to raise a £60,000 mortgage to buy a 30 per cent share," Louise explains. "The repayment on that loan is about £300 a month and I then have to pay another £450 in rent to the housing association which owns the rest of the property."

In addition, Louise had to raise a £3,000 deposit to put down on the flat, which she borrowed from her grandparents.

"I also had to fill in forms, explaining why I was a deserving case for the housing association," she says. "I still pay quite a bit each month, but I'm on the property ladder and that would never have been possible without this help."

Comments