First time buyer basics
If you have yet to buy your first home, it may feel as if the property ladder is being pulled up beyond your reach. Don’t despair – while it is undoubtedly true that getting into the housing market for the first time is tougher than it once was, there are first-time buyers moving into new homes every day. It is not an impossible dream.
The good news is that housing affordability has actually improved markedly over the past few years. House prices have fallen from their peak, earnings growth has seen incomes rise – if not as quickly as in the past – and interest rates are at their lowest levels in history. Mortgages are very good value and there are a wide range of different deals available.
Saving for a deposit
So why do many would-be first-time buyers feel locked out of the market? The problem, often, is how to scrape together the deposit for your first home. How big a deposit you need should be one of the first things you consider when buying a home.
Mortgages are assessed on a loan-to-value basis. The loan is calculated as a percentage of the value of the property on which it is secured. So if you borrow, say, £160,000 to buy a home priced at £200,000, you’re taking out an 80 per cent loan-to-value mortgage.
The other 20 per cent in that example has to come from you. It’s the deposit you’re putting down on the property from your own pocket. And where lenders once required only small deposits from first-time buyers – or even, in many cases, no deposit at all – they are now much more cautious.
Today, it is almost impossible to get a 100 per cent mortgage and only a handful of 95 per cent loan-to-value deals are available. More usual is a requirement for a deposit of at least 10 per cent. Some lenders require more and the smaller the loan-to-value you require, the better the mortgage deal you’ll be offered. Typical first time buyer mortgage rates.
First time buyers and negative equity
This change of practice is not unreasonable. A mortgage provider who lends 100 per cent of the value of a property is very exposed. If house prices fall and the borrower defaults, even selling the home won’t repay the debt in full. The smaller the loan-to-value, the larger the comfort cushion for the lender.
Still, this requirement for larger deposits has frustrated many first-time buyers. The average first-time buyer currently pays around £150,000 for his property, so a 10 per cent deposit requires savings of £15,000 – a sizeable sum.
Still, remember that your deposit gives you some protection too. A home that is valued at less than the mortgage owed is said to be in negative equity. That’s not necessarily disastrous if you’re on top of the repayments, but it may leave you trapped in the property unable to move.
Ask for mortgage advice
It’s really important that first-time buyers don’t give up – and there is more help on offer than you may realise. You should certainly take impartial and expert advice on the mortgage product that best suits your circumstances, but it may also be necessary to be more imaginative.
Some first-time buyers are able to secure a home with family help, for example, even if that’s just a question of parents acting as guarantor or by using special family mortgage product. There are various ways that parents can help first time buyers. Buying with friends is another possibility and the number of shared ownership and shared equity schemes, often with links to affordable housing, is increasing all the time.
For more ideas, you can speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available lender, and because they’re paid a salary – not a sales commission – you can have confidence that you’ll receive truly impartial advice.