The property boom that Britain has enjoyed over the last decade has brought millions of pounds in profit to thousands of home owners. The flipside of this good economic fortune is that it is harder than ever to get on to the property ladder. But it can be done.
The most obvious benefits of home ownership are security and the potential returns on your investment. If you decide that you wish to buy, you need to calculate how much you can afford to spend. Lenders are generally prepared to lend three times your salary or, if you’re a couple, three times the larger salary plus the smaller salary, or 2.5 times the combined salaries. Some lenders, such as Nationwide, lend according to affordability.
The rule of thumb is that your monthly mortgage repayments should not take up more than around 35% of your monthly income. Bear in mind that you must also set aside funds to cover mortgage administration and legal fees, as well as other costs such as moving home and buying furniture. Some mortgage deals offer to pay legal fees, and cashback deals are also useful to raise cash.
Raise as much of a deposit as you can. While there are plenty of 100% mortgages around, they can be risky if property prices slump and you are precluded from more attractive interest rates. The bigger the deposit, the better the deal.
How to make it affordable
With first-time buyers in 80% of towns in Britain priced out of the market, according to Halifax, many prospective buyers are receiving financial help from parents or clubbing together with friends. If you are buying with friends, it is imperative that you draw up a contract that clearly states what will happen in the event that one of the parties wants out. Before you do anything seek advice from a lawyer.
Parents can help in a number of ways. They can release equity from their own property and lend you a deposit or act as guarantors on a mortgage. Parents wishing to help in this way should seek legal advice as they are liable for the whole loan if anything goes wrong.
Shared ownership is another option worth considering. In a housing association
scheme you usually pay around 25% of the property's worth, then pay rent with
the option to own the house outright in the future. The government has a list
of associations at www.housingcorp.gov.uk.
If you don't mind living with a tenant, the Government's Rent-a-Room scheme
could be of use. Homeowners are allowed to earn a tax-free rental income of
up to £4,250 each year (including contributions to any bills). Some lenders
will take this income into account when deciding how much you can borrow.
Mortgages
Once you have a deposit (or have decided to go for a 100% mortgage) you can start shopping around. Home loans are available from building societies, banks, IFAs and brokers. Criteria you should look at include the interest rate, lock-ins (where you are committed to staying with the lender for a certain amount of time) and redemption penalties (incurred if you change lender or pay your loan off early). When you apply for a loan, lenders will assess your credit history, salary and savings.
There are two types of loan: repayment and interest-only. With a repayment mortgage, you pay back the amount you borrow and the interest accrued with your monthly payments. With an interest-only deal you only pay off the interest monthly and take out a separate investment to pay back the capital you have borrowed. While a repayment deal is a safer bet, interest-only deals are a good way of keeping costs down in the early years of a mortgage, provided you switch to a repayment deal as soon as you can. Have a look at some of the current best buy mortgages. If you would like to get mortgage advice you can talk to a mortgage professional.
Here is a brief outline of the different types of mortgage available:
Endowment (interest only): You pay the interest on the loan each month, and to repay the capital you invest in a life insurance policy spread over the term of your mortgage. Similar deals are available that replace the endowment part with an Isa.
Fixed rate (repayment): Appeals to first-time buyers, as the level of monthly payments is set over a fixed period. Ten-year fixes are available now but most advisers would recommend a five-year deal.
Discounted rate (repayment): These deals undercut the lender's standard variable rate of interest and offer a low monthly payment in the early years of the deal.
Tracker (repayment): Tracks the Bank of England base rate up or down.
Capped rate (repayment): Tracks the base rate but never breaches or falls below levels of interest rate set by the lender.
Buy-to-let (repayment): Investment properties must be bought with a buy-to-let mortgage and usually carry higher interest rates.
Cashback (repayment): Releases equity from the loan. In effect, you borrow (for example) 125% of the purchase price and use the extra 25% as a personal loan.
Flexible (repayment): Available to those who have a sizeable deposit (commonly 25%). Allows borrowers to make overpayments and take payment holidays. Good for freelance workers.
Other costs
So what other costs are involved in the housebuying process? If your loan is more than 75% of the value, you may have to pay Mortgage Indemnity Guarantee cover. This is insurance for the lender should your home be repossessed when its market value is less than that of the loan it has given you. Some lenders have scrapped this cover. Check before you sign anything and negotiate.
The mortgage arrangement fee is usually about £300 and is non-refundable. Land Registry fees can range between £40 to £800 depending on the property, and solicitors' fees are usually about £300-£500. Stamp duty is charged on homes worth more than £60,000. The charge is 1% on properties worth £60,000-£250,000, 3% on properties worth between £250,001-£500,000 and 4% on properties worth more than £500,000.
