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Mortgage advice for first-time buyers

Amanda Jarvis

February 8, 2005

There is no doubt that the current property market has hit the first time buyer hard. Statistics just released by The Halifax indicate that first time buyer market activity is at its lowest level for twenty years, thanks largely to recent house price rises combined with a shortage of affordable new properties.

Lenders have been doing their best to help first time buyers gain a foothold on the property ladder by increasing income multiples. For example, the Northern Rock is currently offering a 4 times joint income 100% mortgage, subject to credit scoring and status.

Affordability

Other lenders have also begun to provide similar facilities by starting to work on the affordability aspect of the mortgage, rather than sticking rigidly to strict income multiples. Lenders such as The Halifax, Intelligent Finance and The Nationwide are choosing to base their calculations on whether the applicant can actually afford to make his or her monthly repayments, instead of what proportion of their income they represent.

Longer Terms

Although the standard length of a mortgage remains at 25 years, it seems obvious that the longer the term of the loan, the lower the monthly repayments will be. And lenders are starting to switch on to this tactic as an ideal way of keeping mortgage repayments affordable.

With this in mind, first time buyers can now choose from some lenders that are offering mortgages that extend to 30 or even 35 years. But, while this undoubtedly helps with the monthly budget, one note of caution to sound is that the total interest payments over the life of a longer term mortgage will be higher than for a conventional 25 year term.

Shared Equity

While shared equity is still a rare phenomenon, recent price rises have made this an increasingly common way of getting onto the property ladder. The basic principle behind shared equity is that the seller – most commonly a builder – will retain for example a 25% stake in the property. The purchaser
can pay this off at any time in the future, subject to certain conditions being fulfilled.

Using this facility, a first time buyer can purchase a 75% stake in a new home for, say £75,000, and then pay the builder the remaining 25% share when he or she is able. One point to note though is that the share that remains owing to the builder will normally be calculated as a percentage of the market value of the property. Therefore, assuming that house prices increase
in the future, the homeowner could end up owing more than the £25,000 in our example. Conversely, if prices were to devalue, the net amount representedby the percentage that he or she owed would be less.

Shared Ownership

Shared ownership schemes have been running for a number of years, and allow homebuyers to purchase a property in which a housing association owns are stake. In practice, this means that the buyer will purchase a 25% to 50% part of the property, and then pay rent to the housing association on the remaining share.

Many of the high street lenders will accept mortgage applications on this basis. The schemes also offer the facility for buyers to purchase increasing shares of their home from the housing association, over a period of time – generally known as 'staircasing'.

Guarantor Mortgages

Although still popular, some lenders have recently tightened up their criteria on who qualifies for this type of scheme. In principle, a guarantor mortgage enables an applicant such as a first time buyer with a lower income to include a member of their family on their mortgage to 'guarantee' the loan repayments.

Nowadays, lenders such as The Halifax, NatWest and The Nationwide will accept a guarantor mortgage application as long as the applicant is in a profession. This means that they will expect their income to increase over the next five years to allow them to take on the mortgage based on their own income, without the aid of the guarantor.

Although this has reduced the availability to certain potential cases, the Bank of Ireland has filled the gap by offering their 1st Mortgage. Briefly, this product allows a guarantor's income to be used to calculate how much can be borrowed, as well as including the applicant themselves. Any existing mortgage commitment of the guarantor is treated as an annual outgoing for the purposes of calculating eligibility.

Family Offset Mortgages

Family Offsets work in the same way as a conventional offset mortgage – in other words by 'offsetting' the balance outstanding on the home loan with accumulated savings, kept in the same 'pot' as the mortgage. The key difference with a family offset, however, is that the savings are placed by – and belong to – a family member other than the borrower.

The savings in the 'pot' cannot be accessed by the borrower, nor indeed by anyone other than the saver so, in this case, the female partner's parents would be able to have access to their own funds at any time, but must be made aware that if they draw funds from the account, this will have a direct effect on the amount against which the mortgage can be offset.

Because the savings deposited are offset against the interest chargeable onthe mortgage balance, they can have a substantial effect on the term remaining on the mortgage. The potential downside that needs to be pointed out though is that the monthly repayments are initially calculated on the basis of length of the original term. The lump sum deposit is then applied
to the debt, but only goes to reduce the remaining term of the mortgage, not the actual monthly cost of the loan.

Buying With Friends

Often a very popular way of getting onto the property ladder, as property prices have spiralled, the concept of buying with friends has gained further momentum. In principle, this offers first time buyers, who individually would be unable to afford their own place, the opportunity to purchase a home together.

Although an excellent idea in principle, buyers should nevertheless be careful of the way in which their ownership is registered on the title deeds. If they are described as joint tenants – which is the usual way for couples to hold property – it is assumed that they own the property in equal shares. Moreover, in the event of one passing away, the other will
automatically inherit the deceased's share, regardless of the terms of any will.

Obviously, this would be undesirable in these circumstances, so friends must ensure that they own property as tenants in common. This enables them to specify what percentages each of them will be entitled to when the property is sold, as well as safeguarding how their share would be gifted upon death.

So, in summary, despite the high cost of buying that first home, there are a number of excellent schemes that can ease the pain of taking that first step onto the property ladder


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