Buying your first home can be a hard enough process at the best of times, but in today’s rapidly growing market it is more difficult than ever. Property prices, especially in the cities, have soared beyond expectations – leaving many first-time buyers literally out in the cold.
Although there are some mortgage products that are able to compensate for the massive incompatibility between house prices and wages, such as the 110 per cent loan-to-value mortgage and five times annual salaries, these are few and far between and they mean more risk for the buyer.
However, it is perhaps the sheer competition that poses the biggest problem for potential buyers. Block viewings are not uncommon, whereby perspective purchasers simply view the house as a group, and then race to be the first to put in an offer. If a member of this group is a professional developer or cash purchaser, then it is not unusual for the first-time buyer to be left behind.
Social impact
There is a social impact to be taken into consideration here, as this problem of first time buyers finding it harder and harder to purchase their first property may have consequences that are worse than first thought. At worst, property ownership provides a secure nest egg for retirement; at best it has created some very wealthy individuals.
Not having the security of having fully paid for your own home by the time you reach retirement can have a dramatic effect – especially with pensions not performing as well as they once did.
In the somewhat nearer future, the difficulties caused by rising house prices will cause problems elsewhere too. The economy will slow down as families, now having to save more, will have less disposable income, and as they can no longer afford to educate their children how they wish, or use private healthcare, the education system and the NHS would feel the strain too.
Where will it all end?
The government has introduced a couple of strategies to help first-time buyers. The stamp duty threshold was recently raised to 175,000, and the introduction of Home Information Packs (HIPs)was intended tohelp this group of buyers above all others – although perhaps not to the extent that was initially hoped. All local authority searches, and drainage and water searches, will be carried out by the vendor and service charges for leasehold propertiesare completely transparent. In addition, an Energy Performance Certificate (EPC) will be included, therefore enabling buyers to see how expensive it will be to run their home.
The Shared Ownership Scheme (see below) is a great way for low-paid employees to get on to the property ladder, in an innovative move by the government. The initiative is aimed at key workers, and implemented by housing associations.
Regardless of all of these new schemes, however, it ultimately comes down to the first time buyer themselves to get on to the property ladder. It may be a tough process, but with enough research, effort, creativity and innovation it is certainly possible.
Ways to get on the property ladder
Fear not! Despite all the depressing statistics, there are a range of ways to help first time buyers get on to the property ladder.
1. Save! This may seem obvious and a little old fashioned, but it is often overlooked for these very reasons. Perhaps harder than it once was due to increasing rent prices, saving up enough money to buy a first property is still possible if you’re willing to make a few sacrifices: ditch the studio apartment for a room in a shared house, or – even better – move back in with your parents for a while. The money you save on rent will really give you some results in your savings account, and if you’re willing to take on a second part-time job as well then you’ll be well on the way to your first property purchase in no time.
2. Borrow – There are a number of options available to you if you want to take this route, including some loans which are specifically tailored for graduates and professionals as well as the offer of five times your income. More and more these days, mortgages are available over much longer terms – sometimes up to 40 years – although your eligibility for such loans will of course depend on your age. The downside to these sorts of mortgages is that you’ll be paying thousands of pounds more interest over the term, but there is always the option to remortgage after a couple of years to a shorter term. If this still seems a little out of your reach, you could always consider the initial stretch of taking out a secured loan on the property as soon as you have completed. However, this will immediately land you in negative equity, and you may be stuck there for some time if the market crashes. See our Types of Mortgage Fact Sheet for more information.
3. Bank of Mum & Dad – Many parents appreciate the difficulty of getting onto the property ladder today and may be more than willing to offer a helping hand. The ways that they can aid your property purchase are numerous, ranging from matching your savings to put towards a healthy deposit, to going guarantor on a mortgage. Put simply, this means that should you miss a monthly repayment they will be liable, however they must have at least 30 per cent equity in their own home in order to qualify. Alternatively they may wish to transfer some equity into your new home on the basis that you buy them out as soon as you are able.
4. Co Buying – This can be a great way to pool resources, increase the amount of deposit you can put down and reduce your monthly payments. You could buy with a relative, friend or even a stranger, and there are specific mortgages available for this kind of buying – although provided you register the property as Tenants in Common rather than Joint Tenants there is no reason why a traditional mortgage shouldn’t be suitable. Registering as Tenants in Common will ensure that your co buyer wont inherit your half of the property, and to safeguard yourself fully you need to make sure that you have a water-tight contract to cover both of you in any eventuality. Another must is a Deed of Trust to legally define who owns what percentage of the property.
5. Buying at Auction – You can find some really great deals at auctions, and although the days of real bargains may be over when it comes to property, many homes will still be very affordable and reasonably prices. There are a few things to consider first though, and organisation is key here: strict rules state that as soon as you have won an item under the gavel, the ten per cent deposit must be paid there and then, so getting the survey done before the auction is vital. Another point worth mentioning is that you only have a further 28 days before completion, so getting an efficient solicitor is important. You can see our Buying at Auction Guide for more information.
6. Buy in a Different Area – If you’re keen to get on the property ladder but aren’t necessarily itching to move house yourself then this can be a great idea, as property in other areas of the country – or even abroad – can be a lot cheaper. Buying and then renting out the property can enable you to get a head start and ensure that you’ll be able to buy more property in the future.
7. Rent-a-Room – The Government’s rent-a-room scheme enables you to earn up to an extra 4,250 per annum tax free if you have a lodger – which is great news if you know you’re going to have trouble with monthly payments. Because the price of a property with two bedrooms is never a vast amount more than with only one, this could be a really good way to supplement your income and allow you to buy your first home.
8. Renovate – It may be a daunting prospect for many first-time buyers, but purchasing a home that needs work can be very lucrative. The cost of a kitchen or bathroom are less than you might think, therefore giving you the opportunity to add value to the property. Don’t be put off by competition from developers either – in order for a developer to make a profit they need to buy the property at a bargain price due to all of the red tape involved. You, however, won’t be selling your home immediately and so don’t need to realise an immediate profit. Basically, renovating on a small scale can give you the look you want at a price you can afford.
9. Buy Off-Plan – Securing a future property for its market value today can be a great way of saving some money, as well as allowing for a little negotiation on things like the fixtures, fittings, stamp duty and deposit – even if the asking price is fixed. You can make a significant saving here, but do bear in mind that timing is important. There are times during the process where developers rely on cash flow more so than others, and these times are usually once project has first been released, and when it is almost complete. If you get this right, you can get a property for a nice amount less than it will be worth.
10. Avoid Stamp Duty – Any property that you buy under 175,000 will be exempt from stamp duty, as this is the current threshold. While it might be difficult to do this in areas like London, there are stamp duty exempt areas – a list of which can be found on the Inland Revenue’s website (www.hmrc.gov.uk/so/dar/index.htm).
11. Choose your mortgage carefully – There is a wide range of mortgages currently on the market, however there is more to choosing a product than the monthly repayments. If saving your initial outlay is your prime concern, then you need to be looking for a mortgage that doesn’t have any arrangement or administration fees – of which there are plenty out there. If you can’t find one that suits your needs, ask if you can add theses fees onto the mortgage itself – you may even be able to add on conveyancing fees. This will bump up your monthly repayments slightly, but will save you stumping up the cash in the beginning. See our Choosing a Mortgage Fact Sheet.
12. Negotiate – As a first-time buyer you are in a great position, so ensure that you use this to your advantage. Finding that dream home is just as difficult for your vendors, and once they have found it they are unlikely to want to let it go. This means that they may be willing to accept a lower offer from a first-time buyer simply because you are not in a chain – the risk of losing their next property is perhaps not worth haggling over a couple of thousand pounds.
13. Shared Ownership Schemes – Aimed at key workers such as NHS staff and teachers, these schemes are occasionally operated by housing associations and trusts and offer a good way to get onto the property ladder for those who otherwise couldn’t afford to. The idea is that you can buy a share in a house and pay rent on the remaining balance, and in the future buy more shares as and when you can afford to. Of course eventually you can buy the property outright. One thing to bear in mind, however, is that if you wish to sell, the housing association will have first refusal.
14. Rent-to-Buy – This means that while you rent a property, half of your rent each month will be put aside on your behalf to create a deposit that you can use later down the line. This is a relatively new idea in the UK, but it has great advantages – the obvious one being that you can secure your property for today’s market value, whilst not throwing money away on rent every month.
15. Ex-Local Authority – Council homes can often be as much as 20 per cent cheaper than similar homes from the same period, solely because they lack character. This makes them very attractive purchases because of the price, and you’ll find that they are also generally very spacious compared to many homes being built today. In addition, many have outdoor space too – even if it is only in the form of a balcony.
16. Compromise – Finally, perhaps the best advice is to re-think your needs and make compromises in order to get on to the property ladder. While two bedrooms may be vital, do you really need a garden? Or perhaps outdoor space is a must, in which case would it be possible to find some room for the desk in the lounge? You’re more likely to find what you want for the right price if you’re willing to be flexible, and after all – your first home is unlikely to be the one you’ll spend the rest of your life in.
Speak to a conveyancing solicitor today and get the advice you need.
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