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Your Money > Mortgages Articles > Get a leg...
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By Naomi Caine
House prices are bouncing back. Halifax has just reported a rise of 1% in September. It's the third successive monthly increase and brings annual house-price inflation up to 8%. The average house now costs £180,000, according to Halifax. If you want to buy in Greater London, the typical price is even higher at an eye-watering £270,000. But the average salary is about £28,000, so many homes are beyond the reach of the typical earner - and way beyond the reach of the typical young buyer. There are potentially three hurdles to buying a dream home. First, can you get a big enough mortgage? Most banks and building societies will agree to lend about three times your annual salary. So a typical customer could borrow up to about £85,000 - and that might not be enough. Then there's the deposit. You normally have to put down a deposit of at least 5% to get your pick of the mortgage deals. But 5% of £85,000 is £4,250, which is a lot of money when you're in your 20s - especially when you take into account the other moving costs such as stamp duty and solicitor's fees. Last but not least, can you afford the monthly mortgage payments? Interest rates are still at record lows, but if you are borrowing a lot of money, the cost easily mounts up. The monthly payments on a £100,000 mortgage at 5% over 25 years are £585. The Bank of England raised interest rates by a quarter of a point to 4.75% in August. And there is every reason to suspect they will go up again sooner rather than later. Lenders are coming up with innovative ways to help people finance a house purchase. Parents are also getting more involved - about half of all first-time buyers get help from their mum and dad, according to the Council of Mortgage Lenders (CML). So what can you do to make your first home more affordable - and what are the pros and cons? Click here to visit Yahoo!'s Mortgage section and find the right mortgage for you Save for a deposit Experts usually recommend that you save up for a deposit because it will mean you can choose from a wider range of mortgages and so secure a better deal. If you cannot get the money together, parents can help. If they give you the money outright, it could even reduce their inheritance tax (IHT) bill because it will fall out of their estate for IHT purposes if they survive for seven years after the gift is made. Click here to visit Yahoo!'s Tax section and find out more If they lend you the money, it's not so tax-efficient. You might like to use this argument in favour of an outright gift! If you parents are not in a position to help, there are a number of so-called 100% mortgages that do not insist on a deposit. But the rate of interest is usually one percentage point or more above the rate of standard loans. You can also in some cases borrow more than the total property price. Northern Rock's Together mortgage, for example, allows you to borrow up to 125% of the price of the home. The first 95% is a standard mortgage, so is secured against the property. The rest is classed as a personal loan but the rate is the same. There is a fix at 5.99% over two, three five or seven years. Mortgage Express offers a similar deal and you can borrow up to 130%. Some lenders give special terms to graduates or members of certain professions. Scottish Widows, for example, will lend graduates 102% of the property's value; professionals can borrow up to 110%. Scottish Widows charges graduates 5.49% on its three-year fix. Watch out for higher lending fees. Some banks and building societies charge a one-off premium if you don't have a deposit, which can be expensive. David Hollingworth of London & Country Mortgages, a broker, says: "Saving for a deposit, often well into five figures, is one of the biggest obstacles to first-time buyers. But you will pay a much higher rate of interest for a 100% mortgage. It's simple - the bigger your deposit, the bigger the choice of homeloan." Click here to visit Yahoo's Savings section and find the best high interest accounts Keep it in the family Some people ask their parents for help with more than a deposit. Parents can also help arrange a mortgage because the child might need to borrow more than the standard income multiple of three times their salary. The average first-time buyer now has to take out a loan worth a record 3.24 times their income, according to the CML. A parent can either act as a guarantor, or can jointly own the property. If they act as guarantor, they are effectively responsible for the mortgage. The lender will calculate the loan according to the parents' income - after any existing commitments - and it will be secured against their own home. Scottish Widows Bank and Skipton building society are a bit more flexible, allowing guarantors on a 'top slice', so they only need to show they can cover the portion of the loan over and above the amount the child can borrow on their own income. A guarantor mortgage can work well if your parents are wealthy, but they could lose their house if things went badly wrong. Joint ownership is similar, but the lender will take into account both the parents' and the child's income. The mortgage will also be secured against the property you are buying. Philip Davies, chief executive of Linden Homes, says: "A joint purchase gives parents more input into the choice of property and closer control over decisions made concerning their investment. In addition, joint purchases can be a great way for parents to make an additional property investment while assisting their child in their first property purchase." However, the sale of the house could incur a capital-gains tax liability for your parents, because it would not be classed as their main residence. Bank of Ireland's First Start Scheme is proving increasingly popular with young people and their parents. The deal lets first-time buyers borrow four times their annual salary - or four times their parents' income, after any existing mortgage payments have been deducted, plus one year of the borrower's salary. So, if someone earned £20,000 a year, they would qualify for an £80,000 mortgage. But if their parents earned £35,000 and paid £3,750 a year in mortgage payments, Bank of Ireland would lend four times the remainder of £31,250, amounting to £125,000, plus one times the child's income of £20,000, giving a total loan of £145,000. Alternatively, the bank will also lend 2.75 times the parent and child's joint income. If you can put down a 5% deposit, there is a two-year discounted rate of 5.29%, or a five-year fix at 5.55%. Nick Gardner, a director of Chase de Vere Mortgage Management, says: "This is a much more flexible approach than most guarantor schemes, and is actually classified as a joint mortgage. However, the parent's property is not at risk because the mortgage is secured on the child's property." Alternatively, Newcastle building society allows a group of family members to pool together some savings, which are then offset against the child's mortgage. If the mortgage was £100,000, and the family pooled £50,000 together, then the child would only pay interest on the outstanding balance of £50,000. Newcastle offers a two-year fix at 5.10%. Or there are several loans that track the base rate. But you must have a deposit of at least 15%. If you can't call on your parents, some lenders will offer higher income multiples to some customers. Gardner says: "Northern Rock will let you borrow well over five times your income, although you might have to take out a certain type of loan. Standard Life Bank and Scottish Widows will also often lend more than three times salary to professionals." Alternatively, you could find a lender that bases its loan calculations on affordability rather than rigid salary. They will want to know details of your incomings and outgoings before they assess how much you can borrow. Lenders that offer mortgages based on affordability include Alliance & Leicester, Halifax, Bank of Scotland and Cheltenham & Gloucester. But take care not to stretch your budget too far - and always be honest about your income. Buying with friends There has been a big increase in the number of people who are clubbing together with friends or siblings to buy a house. HSBC reports a 50% jump in the number of applications for group mortgages since the start of 2006. Carina Kemp, head of mortgages at the bank, says: "More and more people are getting round high property prices by clubbing together with friends or family to buy a home, and this is a trend which we expect to continue." HSBC has followed the lead of other lenders, including Cheltenham & Gloucester, Abbey, Halifax and Britannia building society, and recently launched a range of group mortgages. The deals allow as many as four applicants to sign up together - and they can usually choose from the standard range of homeloans. It sounds like a great idea, but there are potential pitfalls. For a start, some lenders will not take into account all four salaries. Instead, they might base the loan amount on the highest two incomes. Experts also recommend you draw up a plan, almost like a prenuptial agreement, in case things go wrong. Bernard Clarke from the CML says: "Will you and your friends agree on a property and how long do you want to live there? You may also want an arrangement that protects your individual shares if you put in different amounts and pay different amounts of the mortgage. "With most mortgages, all of those who sign up will remain liable for the whole debt, jointly and as individuals. So, you need to know how you will cope if someone can no longer pay their share, or doesn't want to. And can you devise a scheme that is flexible enough to allow someone to move out and sell their share if they want to move on unexpectedly? It's a challenge and will only ever suit a small proportion of borrowers, but buying with friends can work if you can devise an arrangement that addresses the potential problems." Shared ownership Open Market Homebuy is a new government initiative aimed at helping key workers get on the housing ladder. But they have to follow some strict rules - and give up a share of the property. The key worker must own at least 75% of the property and must arrange their mortgage with one of four lenders - Advantage, which is owned by Morgan Stanley, an American investment bank, Bank of Scotland, Nationwide or Yorkshire building society. The remaining 25% is split equally between the government and the lender. They charge no interest on their share for the first five years; the interest rate is then 3%. But the interest rates on the other share are high. Yorkshire, Nationwide and Bank of Scotland, for example, all charge 5.75%. You can buy out either the government or the lender at any time. If you don't they will get a share of any rise in the value of the property when you sell. Advantage also offers a Flexishare mortgage, which is separate from the government initiative and open to anyone. You must put down a minimum 5% deposit and can take up to 80% of your loan as a normal mortgage fixed at 5.99% the first year, 6.99% the second year and then 7.24% in year three. The shared equity element - which can consist of between 15% and 35% of the mortgage - is fixed at a low rate of 2.99%. Again, Advantage takes a share in the increase in the property value based on its share in the equity. Shared equity schemes don't go down particularly well with experts. The lender's stake in the property is a potential downside when you sell. The rates on your share of the loan are also often higher than the best deals, which can wipe out the benefit of the lower rate on the lender's share. Melanie Bien of Savills Private Finance, says: "If you can get on the property ladder any other way, then you should do it." Click here to read more about Shared Ownership Cut the monthly payments If you have managed to get a mortgage but you are keen to keep the monthly cost down, there are a couple of options. The first is to take out an interest-only loan. You pay only interest to the lender each month but none of the original capital. So at the end of the mortgage term, you still have a big debt. You can either set up a savings scheme to run alongside your mortgage, or you can hope that house prices have risen sufficiently to clear the debt. Either way, you are taking a risk. But the monthly payments are cheaper than a standard repayment mortgage, where you pay both interest and some of the capital debt each month. For example, if you borrowed £100,000 over 25 years at 5%, the monthly cost of a repayment mortgage would be £585, or £417 on an interest-only loan. Mark Chilton, chief executive of Purely Mortgages, says: "It's worrying that there is a rising trend towards interest-only mortgages, which are seen by so many as a cheap way of affording their mortgage repayments. People seem to forget that the longer they leave repaying the debt, the more interest they are going to pay and the longer they're going to be left with a hefty loan. While we understand there is a place for interest-only mortgages, particularly for first-time buyers struggling to get on the property ladder, we'd urge people to revert to a repayment mortgage as soon as is affordable." A better option might be to take out a mortgage with a longer term, say 30 years instead of 20. Then monthly repayments would drop from £585 to £537 if you took out the repayment mortgage for a longer term. But you will pay more in total interest and you should always aim to clear your mortgage before you are due to retire. 'Cheap' deals Some lenders offer mortgages that charge rock-bottom interest rates for one or two years - sometimes as low as about 2%. However, at the end of the special deal, you might be pushed onto a much higher rate. You would also be locked into the mortgage for several years, or have to pay a hefty penalty to switch to a cheaper loan. Jonathan Cornell of Hamptons International Mortgages says: "There is nothing for free with these loans as they invariably come with an extended tie-in at a far higher rate, meaning you can often end up paying more than with other mortgages. Most first-time buyers should steer clear of these products altogether unless they are absolutely desperate for very cheap payments in the early years - for example, if they are absolutely certain they will be coming into more money later down the line." Useful links
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