First Time Buyers - what are your options?
If you are a potential first time buyer and thinking of starting your journey to home ownership in the next few months, we thought it might be helpful to set out a few of the options that could be open to you.
Firstly, the stamp duty changes. The recent announcement by the Government sees stamp duty for first time buyers reduced to 0% on purchases up to £300k, and on properties priced between £300k and £500k, stamp duty is payable at 5% on the amount over £300k. On a £300k property, this will potentially save you £5k, which is a very useful saving. For higher purchase prices, use our helpful calculator on our website so that you can see the cost.
For most first time buyers, the biggest challenge is raising a deposit. The days of being able to borrow the full purchase price (or even more) are long gone, and a deposit is always required unless you are buying a shared ownership property. The position though is not as difficult as it was a few years ago; there are now quite a decent number of lenders who will lend 95% of the purchase price, meaning that you only need a 5% deposit. This is the level that first time buyers have historically typically borrowed at.
The risk of loss to the lender is greater the more you borrow, so you can expect the interest rate to be higher, as a consequence. Rates for 95% borrowing start at a little under 3%, whereas rates for 90% borrowing start at a little under 2%: a saving on the interest rate of circa 1%. Increasing your deposit can help save money on the mortgage costs. Why not play on our monthly payment calculator to see how much difference a 1% increase would make?
Some first time buyers will be attracted to second-hand properties, but others will want a new build. If this is you, you might like to consider the Government's Help to Buy scheme (HTB). HTB works by separating the borrowing into two separate loans. Firstly, you take out a conventional mortgage, most typically borrowing 75% of the purchase price. You can apply for Government funding of up to 20%, which is called an HTB Equity Loan, meaning the 5% shortfall is provided by you, via a normal deposit.
The HTB equity loan carries some useful benefits. The most significant benefit is that it is interest-free for the first five years, which can greatly improve your overall financial cash flow during this period - in effect you are living in a property which is costing you less than an equivalent second hand one. Once the five years is up, you then start to pay interest on the loan, which at the moment is set at 1.75% for the first year. In every subsequent year, the rate increases by RPI plus 1.00%. You can find out more about the HTB scheme in our Quick Guide, including some information regarding the drawbacks of the scheme.
If you don't want to buy a new property then HTB isn't an option, and if you cannot raise a minimum 5% deposit then does that mean you cannot buy? Well, it rules out the most conventional approaches, but it doesn't necessarily mean that the answer is no.
One option is shared ownership. This involves buying part of a property, with a housing association owning the remainder. You take out a mortgage for the part you are buying (and it is possible to borrow all of the money, meaning that you don't need a deposit), and you pay rent to the housing association on the share that they own. There are disadvantages as well as benefits, and we can talk to you about this in more detail.
There has been much talk in recent years about the ‘Bank of Mum and Dad’. At it's simplest, this means that your parents (or other close relatives) will either give or lend you the deposit (and there are now lenders who will operate on either basis so it doesn't have to be a gift). This clearly works well where the family can afford to hand over a significant amount of money and not expect to see it returned anytime soon (or at all), but what about those families who are unable to do this?
Many parents who cannot afford to give money to their children will nevertheless enjoy significant equity in their home; most people who have owned a property for a couple of decades or more will have enjoyed a significant increase in the value of their property during that time. There are various ways that this value can be accessed: it may be possible to remortgage the house and raise additional funds; it may be possible to take out a further advance on the existing mortgage; it may be possible to arrange a second charge loan to provide funds (second charges often do not carry any Early Repayment Charges and can be arranged at short notice, and the rates charged are now very competitive compared to the historical position); there are now specialist schemes where the lender who provides the mortgage for the child will simultaneously take a charge over the parent's property in order to allow a higher level of lending.
Any of the above options are worth considering, but we would recommend that you take specialist advice from a mortgage broker who is able to look carefully at the options. Maxwell Moore would love to assist you: we recognise that as a first time buyer you will be less familiar with the process and the terminology, and we will take special care to ensure that you are comfortable at every stage. Our initial consultation and discussions are free, and we only charge a fee at the point where we submit the application on your behalf. Our standard fee is £350.
We would appreciate the opportunity to talk with you, learn all about your needs and circumstances, and explain to you why we believe that we are the right advice firm for you. If you want to learn more about us then check out the rest of our website. We look forward to hearing from you.
All rates and fees used in this article applicable as at February 2018. They may be subject to change after this date.