Cheap ways of getting on the property ladder
Cheap ways of getting on the property ladder
How to raise the money to purchase your first home.
House prices are rising as the housing market recovers from the slump created by the 2008 housing market collapse. The average first time buyer pays £182000 for their property and the average house now costs over a quarter of a million pounds. House prices are currently increasing at a rate of 3.9% a year, meaning that would be home-owners are aiming at a moving target – they need, on average, to save £1420 a year just to allow for house price inflation.
It takes an average of five years to save for a deposit on your first home. Few mortgage providers will consider a loan exceeding 80% of the value of a property, leaving first time buyers with the task of raising in excess of £36000 for a deposit on their first home. No wonder many would be property owners are struggling to raise the deposit for their first home until they are in their forty’s! To compound this problem the difficulty of obtaining a mortgage is forcing many people to rent or lease which is increasing the cost of leasing or renting a property.
One third of renters had previously owned their own home and nearly two-thirds feel trapped in the rental sector with little chance of owning their own home. Higher rental costs coupled with the rising cost of getting on the property ladder is forcing many people out of the property market altogether. It is increasingly common to find young married couples forced to live with their parents because they cannot afford their own home.
In the UK there is a massive demand for affordable homes. The demand is restricted by the difficulties in obtaining mortgages to purchase these properties. If homes become easier to purchase the cost of housing will increase due to the increased demand and house prices will rise significantly. The only way to restrict and limit the cost of housing is to build more houses, but this is difficult due to a shortage of suitable building land.
So how do you get onto the housing ladder? Firstly find out how much you need to borrow and how much you can afford to borrow. Potential mortgage providers will consider lending three and a half times the primary earners’ pretax income plus the second earners’ income or two and a half times the couple’s joint income, if this is larger. So a couple jointly earning £36000 a year would be offered a mortgage of around £90000.
Since the majority of lenders will only offer 80% loan to value mortgages, the couple would have to find the outstanding 20% to finance their home purchase.
Therefore, a couple jointly earning £36000 a year would be expected to find over £22000 deposit on a property selling for £111600. A 25 year repayment mortgage of £90000 at 3.9% would give a monthly mortgage of £475 a month.However,r there are very few properties selling for £111000. The average cost of a property bought by a first time buyer is £182000. In order to purchase such a property a couple would need to be jointly earning £58000 a year.
Most lenders will take affordability into account. Your current level of debt, number of dependents, your occupation and other criteria will also be taken into consideration.
To compound the problem for first time buyers, the cost of the mortgage and the deposit is not the only cost they have to consider. Valuation, legal, insurance, arrangement fees and other fees can add thousands of pounds to the cost of buying a home and if some of these fees are added to your mortgage you will pay for them many times over the lifetime of the loan.
To check up on the likely cost visit www.moneyadviceservice.org.uk and look up ‘Estimate your overall buying and moving costs’.
At the moment the mortgage rate is at an all-time low, but at some point in the future mortgage rates will rise. You must be prepared for this. Also, if you are offered a special introductory rate expect your mortgage cost to increase significantly once your special offer expires.
So, how do you raise the finance for your first home? Well it’s a long haul, but you will almost certainly need to put down some form of deposit. Set up a high interest savings account and/or ISA and arrange to have a set amount transferred to your savings account when you get paid. That way you save first and are not tempted to spend and save what is left. Make sure that the savings are difficult to access. An instant saver account is useless – lock your money away where you cannot withdraw it easily or cheaply.
Nothing is as cheap as the bank of dad and mum. If your parents are prepared to help you finance your first home so much the better. If you wish to enter into a formal or even legal arrangement to repay them do so, but make sure you can easily afford to do so. Most parents are happy to help their children; you can always repay them at a later date, even when they retire. Another way that your parents can help you acquire your own home is by offering to be a guarantor on your mortgage.
If you earn less than £60000 a year the HomeBuy Direct scheme offers a 30% maximum loan towards the purchase of a new-build home. The scheme is jointly funded by the government and the builder. It is interest free for the first 5 years and is available to first time buyers, key workers such as police officers, teachers and nurses and for those who currently rent from the local authority or housing association.
The title to the property will be in your name, which means that you can sell the property at a later date. The value of the loan changes with the value of the property, so the amount you owe will rise and fall according to the property value.
Do be aware that after 5 years you will incur a fee of 1.75% of the loan value, increasing each year by the Retail Price Index plus 1%.
Check out the scheme at www.homebuyservice.co.uk/homebuy-options/homebuy-direct.html
If the HomeBuy scheme is not for you perhaps you could consider Shared Ownership. Again the earning ceiling is £60000 per annum. You can purchase between 25% and 75% of your home and pay rent on the remaining share. You are required to pay 3% of the shares value and the properties are always leasehold – normally with a 99-year lease period. It is often easier to raise a mortgage on Shared Ownership deals than conventional mortgage deals and the rates are often competitive.
If you opt for a 75% share of a £160000 property your share would cost £120000, with say a 15% deposit of £18000. A 25 year mortgage on the remaining £102000 at 5.79% would cost £652 a month. The rent on the remaining 25% would be £91.66 a month, giving a total of £743.66 per month. With a conventional mortgage, at the same rate, for the sum of £142000 – the property value minus the £18000 deposit – you would pay £907.30 a month.
The government has recently launched a Help to Buy scheme. Open to first-time buyers and existing home-owners purchasing a new build home in England. You require a 5% deposit; the government will provide you with a 20% equity loan. There is a house price ceiling of £600000, so if you are looking for a millionaire’s mansion you may not qualify!
As an added bonus you may also qualify for some very competitive mortgage deals. Some lenders may accept a 4% deposit, but your mortgage rate will not be so competitive.
The equity loan can be paid in full at any time or on the sale of your home, or a percentage can be paid – providing it is equal to 10% or more of the properties current market value. After 5 years you pay a fee of 1.75% on your equity loan, which rises with the Retail Price Index plus 1%. More information can be obtained at https://www.helptobuy.gov.uk.
If you can only raise a small deposit for a home you will almost certainly find it difficult to raise a mortgage on the outstanding balance. The governments Mortgage Guarantee Scheme allows lenders to purchase a guarantee from the government that compensates the lender should you default on your mortgage. This makes it possible to purchase a property with a deposit of between 5% and 20%. It is available to anyone wishing to purchase a property; it is not restricted to new build or first time buyers. Again the property must not exceed £600000 in value.
London, Wales, Scotland and Northern Ireland have similar home buy schemes.
More details can be found on the following websites:
London – www.sharetobuy.com/firststeps.
Help to Buy Wales – www.wales.gov.uk/docs/desh/publications/090715housingownbuyguideen.pdf
Scotland, shared equity – www.scotland.shelter.org.uk click on ‘shared equity’.
Northern Ireland, co-ownership www.co-ownership.org.
The Money Advice Service offers advice on obtaining the best mortgage deals, see www.moneyadviceservice.org.uk and input ‘choosing a mortgage’.
Many national builders have their own schemes to assist people to buy their own homes. Just look them up on the internet or check in the ‘property’ pages of your local newspaper. Many builders and property developers will loan you the deposit or part deposit on your first home.
Another option is to jointly purchase a property with friends or your partner. Seriously consider who will hold the deeds to the property, who will live in the property, what is the contingency should one wish to sell the property or move out and how to split the bills and maintenance and repair costs. More information can be found on www.money.co.uk website; search under ‘Should we get a joint mortgage’ and ‘Should I buy a house with friends’. Want to buy a house jointly, see www.sharedspaces.co.uk.
Another way to get onto the property ladder is to buy at auction. You still need a deposit and a mortgage, but the cost of the property is generally cheaper. You will almost certainly need to renovate your property. Therefore, you need significant DIY or building skills or the money to have the work undertaken for you.
A joint venture with someone in the building trade can be mutually beneficial. You need to carefully research your likely renovation costs before purchasing this type of property, and always allow for additional expenditure, because there is always additional expenditure. Do set a strict budget both for your initial purchase of the property and the renovation costs. Further information can be found at www.money.co.uk under, ‘How to buy a property at auction’.
You can purchase a repossessed property for around 70% of the market value. Often these properties require some renovation prior to moving in. Many of these properties are not advertised. Factor in any re connection costs for services such as gas and electricity and do ensure that your credit score is not affected by moving into a property that has been repossessed. Check out the following websites for more details: www.propertyearth.net and www.whitehotproperty.co.uk.
Buying and living in a static caravan, boat or house boat, or prefabricated home is cheaper than purchasing a traditional home. My sister lives on a boat. Many of the sites selling static and prefabricated homes are located in landscaped grounds. Forget the ‘trailer trash’ mentality; many prefabricated and static caravan homes are indistinguishable from conventional properties.
You could purchase a plot of land and have a prefabricated property or static home erected on it. Make sure planning consent is available. Check out www.staticcaravanclub.co.uk, www.rboa.org.uk and www.prefabs.co.uk, or just Google ‘Kit homes’ and ‘prefabricated and modular buildings’.
Why not build your own home? Check out www.selfbuildportal.org.uk for more information. You can even buy a book, ‘Building Your Own Home – for Dummies’. My friend built his own home in his aunties back garden, and he did a very good job!
If you are desperate to purchase your own home, but are struggling to raise a deposit, consider moving in with friends or parents, downsizing to a cheaper rental property, taking in lodgers, becoming a property guardian or looking after other people’s property and/or animals whilst they are away on holiday or business.
Have you considered relocating to a cheaper area? Of course houses are cheaper in these areas for a reason; high unemployment, higher crime rates, poor schooling, excessive travel costs and many properties may be run down and in need of renovation.
The 10 areas with the lowest property prices in the UK are:
- Belfast and Antrim in Northern Ireland.
- Stoke on Trent.
- Mountain Ash, Glamorgan.
- Bootle, Merseyside.
My son lives in Sheffield and it’s a wonderful city!
If you hunt around in your local area you will find pockets of cheap housing. Property prices in my village are high, but 3 miles away there is a village with social housing and problem tenants that resulted in the village as a whole getting a bad reputation. The problem families are long gone, the village is tranquil and beautiful but because of its previous adverse reputation property prices are ridiculously cheap. Do your research and speak to local estate agents and you will find bargains in your local area.
Finally, don’t be too choosey. Buy a cheap property, renovate and improve it over time and then sell it and move to a more expensive property. A terraced house in our village came up for sale last year. It needed extensive renovation. It was sold for £64000, £30000 was spent on improving it and it is now on the market for £144000!
Bargains are out there, you just need to search for them.
This article is an extract from the book ‘Recession Buster challenge’ available from Lulu.com priced £13.36.