How to afford the unaffordable

Helen Monks takes a look at how some first time buyers have got on to the housing ladder

This week the Deputy Prime Minister, John Prescott, unveiled details of a five-year plan aimed at delivering much-needed help for frustrated first-time buyers on low and middle incomes. The programme aims to help hundreds of thousands by 2010, through an initiative using publicly owned land for new homes, plus the extension of a scheme that allows tenants of local authorities and housing associations to buy a stake in their home.

This week the Deputy Prime Minister, John Prescott, unveiled details of a five-year plan aimed at delivering much-needed help for frustrated first-time buyers on low and middle incomes. The programme aims to help hundreds of thousands by 2010, through an initiative using publicly owned land for new homes, plus the extension of a scheme that allows tenants of local authorities and housing associations to buy a stake in their home.

Mr Prescott also unveiled a competition to find builders to construct quality homes for just £60,000, as well as changes to the planning system to boost the availability of affordable housing for key workers and young families in rural areas.

Measures to boost the chances of first-time buyers cannot come too soon for those forced to plough thousands into rent, as homes in nine out of 10 UK towns become unaffordable. Despite recent falls in house prices, lender Halifax indicates average-priced homes in 548 out of 597 main UK postal towns are beyond reach for workers on average salaries.

Until the DPM's latest plans take effect, there is a range of options available to those whose salaries pale into insignificance against the size of mortgage they need to buy their first home.

For key workers in certain regions, a government-backed scheme - Key Worker Homebuy - offers teachers, NHS staff and emergency services employees among others, interest-free loans of up to £50,000.

Loans of up to £100,000 are also available to London teachers who can prove they are potential educational leaders. The schemes were launched last April and run until April 2006. The equity loans can be used to buy a home on the open market or a new property built by a registered social landlord (housing associations) within reasonable travelling distance of the workplace. Eligibility is determined by what type of workers are needed in particular regions.

Applicants' households must earn less than £60,000 a year. Jacqueline Day, sales and marketing manager at Keystart Housing Association (a so-called "zone agent" of the Homebuy scheme for areas in London and the South-east), says: "The scheme is proving extremely popular and many lenders like the extra security that the equity brings to mortgage applications."

Zone agents can direct successful loan applicants to lenders receptive to borrowers with Homebuy equity, which include high-street banks such as HSBC. When the property is sold or you stop being a key worker, a pro-rata percentage of equity must be paid back. If you buy a house for £200,000 using a £50,000 key worker loan, making 25 per cent of the equity, you will have to pay back 25 per cent of the value of your home when you sell.

Be warned: if you stop being a key worker or plan to move to a non-qualifying area, you will more than likely have to pay back the percentage of the property value within two years.

Shared ownership can enable people with insufficient income to buy a home outright to share the purchase with a housing association and is not restricted to key workers. It involves buying a share - typically 25 to 75 per cent - in a home and paying a subsidised rent on the remaining value. To find out about shared-ownership opportunities in your area, visit www.housingcorp.gov.uk.

Alternatively, you could try calling your local authority for guidance. More lenders are becoming receptive to applications from those entering shared-ownership arrangements. Rob Clifford, chief executive of the independent mortgage broker Mortgageforce, says: "Halifax and Abbey seem quite open to shared-ownership borrowers. Ipswich Building Society has also made this one of its key areas."

If shared ownership does not appeal, mortgages that offer very high loan-to-valuation ratios provide an alternative. One recent, high-profile example of this is the Max 130 home loan offered by Mortgage Express, Bradford & Bingley's specialist lending arm. It allows customers to borrow up to 130 per cent of their property's value at one rate, albeit about 1 per cent more than the most competitive standard deals (either at 6.49 per cent for a three-year fixed deal or at 6.24 per cent under the two-year discount mortgage).

Northern Rock's Together product pre-dates Max 130 and works by combining a secured mortgage with an unsecured loan at a single interest rate with one combined monthly payment. This combination can be worth up to 125 per cent of a property's value. Up to 95 per cent of the value of your home is a secured mortgage, with the remainder held as an unsecured loan of up to £30,000.

High loan-to-valuation mortgages have been attacked by some pundits because they plunge borrowers into negative equity. But there is an alternative view: "When a would-be first-time buyer's existing debts are added to their mortgage, many would already be in 'negative equity' in everything but name, that is, they would have total borrowings that exceed the value of their property," says Mr Clifford. He suggests that, for some borrowers, a mortgage with an extra slug of cash might provide an appropriate escape route from paying higher interest on credit and store cards and overdrafts, as well as allowing them to secure a big enough mortgage.

If you don't need the extra cash, but cannot get together a big enough deposit,an increasing number of lenders are willing to offer mortgages up to 100 per cent or slightly higher. Scottish Widows, for example, has long been active in the graduate market, offering 102 per cent loan-to-valuation ratios. HSBC's graduate mortgage is available to graduates up to five years after they leave university and offers up to 100 per cent of the property value on loans up to four times salary.

If parents want to help their children on the road to home ownership without handing over thousands of pounds, a mortgage such as Bank of Ireland's 1stStart might provide the solution. Parental income is taken into consideration and both parties are jointly liable for the mortgage, without the need to jump the hurdles associated with being a guarantor.

If borrowing the total value of your property feels too risky or will stretch your budget, why not consider coming together with friends to buy? There is plenty of anecdotal evidence suggesting that more young buyers are clubbing together in threesomes and foursomes.

Group mortgage applications will only be offered up to four times the highest income plus one times each of the other incomes. However, Skipton Building Society will lend twice the income of up to four borrowers. Many group mortgages demand you pay a mortgage indemnity guarantee. This protects the lender if you get into arrears - and can add thousands to your loan. Before applying for a collective home loan, remember, everyone on the mortgage deed is jointly liable to make up the balance of the payments if someone leaves. Also remember to draw up a legal agreement before moving in, declaring how much each of you is paying towards the deposit and in terms of monthly repayments.

'Without Homebuy, we would have changed career or moved'

"Without the scheme, it would have been a question of deciding whether to leave the careers we love and are best at, or leave the city we love and come from," says Azita Horwood, deputy head of a school in Fulham. As London prices soared, this was the dilemma that faced her and her husband, Mark, also a teacher.

Last year, they were researching what Government help might be available, when they discovered the London Challenge Teacher Key Homebuy scheme.

This offers higher-value equity loans, up to a maximum £100,000, for a small group of teachers with the potential to become leaders of London's education system in the future.

Their application to the scheme was successful and, with the help of a loan, they were able to move into their new home in Surbiton last summer.

Azita says: "The Homebuy scheme has completely changed our lives - by allowing them to stay the same."

BUYING YOUR FIRST HOME

* Borrow 100 per cent of the cost of your prospective home or more. If you are confident that you can cope with repayments, some lenders won't ask for a deposit and some will offer the chance to borrow 130 per cent of the property's value.

* Some mortgages allow the income of parents to be considered.

* Investigate key worker schemes. You might be eligible for an equity loan of up to £100,000.

* Think about shared ownership. Speak to housing associations to see what is available and find out how you might apply.

* Club together with friends. Up to four people can be named on a property's deeds.