All of us fantasise about owning our dream home. But getting even one foot on the property ladder can be a struggle for first time buyers. Figures from the government reveal that the average house price in the UK now stands at £159,480. But if you are earning an average salary of under £25,000, how will you ever get the mortgage you need?
It is a dilemma facing thousands of people. The number of first-time buyers entering the property market is now at its lowest level since records began in 1974 according to research from the Halifax (latest housing market news). During 2002, 526,300 first-time buyers purchased a property, but this figure dropped by almost a half in 2003.
The mortgage is not the only financial headache. Buying property also means finding cash for valuation fees, the mortgage arrangement fee, solicitor's charges and stamp duty. But don't despair. Lenders are doing more than ever to make dreams come true for first-timers. (For first-time buyer mortgages best buys, click here)
Multiple temptations
Traditionally, you can borrow three times your income, or two and a half to three times the joint income of you and your partner. These are known as income multiples. But many lenders now offer higher multiples to attract borrowers who need the additional cash and are prepared to loan what they think you can afford to pay. It is also possible to obtain four times the main income plus one times the second income or even three times the joint income. It may be tempting to take the maximum amount offered and buy your dream home. But over-stretching your finances could lead to problems further down the line if you cannot afford the higher repayments. Think about what would happen if you lost your job.
100% commitment
Most borrowers save as much as possible for a deposit. Paying for 20 or 25% of the cost of the property will probably help you secure a much better mortgage deal as loans of less than 80% of the property's value tend to be in lower interest rates and attract fewer fees. The minimum requirement with many lenders is 3%. However, with rent and bills to pay and not much left at the end of the month, more and more people are finding it hard to save quickly enough. One alternative is a 100% mortgage. The rates are usually slightly higher on these loans and the downside is that if property prices drop, you will immediately find you have negative equity, where your mortgage is higher than your property value. These deals also tend to attract a Mortgage Indemnity Guarantee or Premium. Put simply, this is an insurance premium you pay for that pays out to your lender if you cannot keep up repayments on the mortgage. In short, these loans cost more and carry more risks.
Keep it in the family
If your income is too low and you worry about over-committing yourself, some lenders offer special deals that accept your parents as guarantors. This means they agree to assist if there are any payment difficulties. Most lenders ask the parent to guarantee all of the loan but some only ask them to be guarantor for the element outside what their child can afford.
The MarketPlace at Bradford & Bingley offers an exclusive version of the 1st Start mortgage, which is specifically designed for first timers. The product allows first time buyers to include their parents income when calculating how much they can borrow. The deal, funded by the Bank of Ireland, is a 2-year discount with a current pay rate of 4.29%. "With many parents having to physically find large amounts of cash to help their children with a deposit, this product offers an alternative solution. It allows parents, or indeed a relative, to use their income to help secure a larger loan, preventing them from having to find all that cash,' explains Elliot Nathan of The MarketPlace.
Take control
Of course, if you do not have wealthy parents or would not want them to have so much control over your mortgage, there are other options. In my next article, I will explain about other special types of mortgage and alternative ways to get onto the first rung of the property ladder.
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