Buying your first home
First-time buyers have been served a particularly tough deal from the years of economic crisis. In the past, mortgage lenders have offered a good deal on home loans and buyers could get a mortgage with no deposit at all, enabling many people to get on the first rung of the property ladder.
However, this all changed in 2007 when the credit crunch hit. It was acknowledged that a lax approach to lending had meant that people were offered credit that they wouldn't be able to repay. As a result, criteria tightened considerably. Mortgages that offered 100% or 90% of a property value completely disappeared. First-time buyers had to stump up a deposit of at least 20% of a property value to get a mortgage.
How much is a deposit?
According to Nationwide building society, the average UK property value in March 2012 stood at £163,327.
Deposits for a home at this price work out as:
5% = £8,166
10% = £16,333
20% = £32,665
Inflated property prices required first-time buyers to save a deposit of tens of thousands of pounds – a difficult feat for those often on the most modest of wages. The government tried to help the ailing market with numerous schemes – from shared ownership to stamp duty relief.
But much to the relief hopeful first-time buyers, loans that require a smaller deposit have started to trickle back on the market. It's likely to be a while, if ever, before 100% mortgages become widespread, but certain mortgage deals do allow this option for first-time buyers that can provide a family member to act as a guarantor. If you do have a guarantor that is willing to be responsible for your loan repayments if you have trouble, you could find that you have a greater number of mortgage options open to you on a small deposit.
Although 90% and 95% mortgages have made a return, they are still considerably more expensive than a mortgage to match a larger deposit. However, it will always be the case that a high Loan To Value (LTV) mortgage (when the deposit is small) will cost more than one with a lower LTV.
When saving to buy a home, you need to decide if you would rather wait and save up a bigger deposit to get a better mortgage rate or be prepared to pay more for a mortgage that is applied to small deposits. But don't forget that it can take a very long time to save a large deposit and you will need to budget hard to get there. Some banks do offer savings accounts specifically designed to help people saving for their first home. But before you agree to open one of these, consider the amount of interest you'll be earning on your savings and do some research to see if you can get a better deal elsewhere. You should also bear in mind that many of these accounts then require you to take out a mortgage with the same provider and again, that won't always mean you are getting the best deal available to you.
In March 2012 the government unveiled its latest plan to boost the first-time buyer market – and the construction industry. The Newbuy Guarantee scheme aims to help first-time buyers with a deposit of only 5% buy new-build properties with select property developers. Someone looking at a £200,000 property will only need a deposit of £10,000 instead of the previous average of £40,000. The Newbuy scheme has received a mixed reaction. Some critics have raised concerns over the affordability of the 95% mortgages that accompany the scheme. New-build properties can cost more than older counterparts and also lose value quicker.
HomeBuy was launched by the government before NewBuy to help first-time buyers in England that have a household income below £60,000. The initiative incorporates a number of schemes to help first-time buyers but access to each depends on where you live in the country.
Some of the schemes, such as HomeBuy Direct and FirstBuy, work by helping buyers to get a mortgage by offering a loan to cover the deposit required for it.
The other schemes mostly allow you to build up equity in a home by buying a share of the property. You then rent the remaining share from a housing association or developer. You can then buy an increased stake in the property at a later date. If you want to move before owning 100% of the home, it's put up for sale through the housing association. However, it can prove very difficult to find a buyer. It's best for those who feel sure that owning 100% of the property is achievable.
- Start saving early for your deposit and other costs
- Talk to a fee-free mortgage broker for advice
- Compare first-time buyer schemes carefully
The more you can save for a deposit, the more competitive the interest rate will be on your mortgage