How to get on the property ladder
Everything you need to know to take your first step towards home ownership
They say an Englishman’s home is his castle, but for many of us getting on the property ladder seems like a fairy tale.
Thanks to soaring house prices and tighter rules on mortgage approvals, the first rung of that famous property ladder can be very hard to reach, particularly for those who can’t stand on the shoulders of wealthy parents.
The numbers show why many of us fear we’ll be drawing our pensions before we get to turn the key in our own front door. The amount of money that a first-time buyer must put down as a deposit has more than doubled in a decade to over £32,000, or £96,000 if you want to live in London, while the average age at which we buy our first homes has risen to 30.
The good news is that both the government and the banking industry have realised that would-be buyers are struggling, and have put a variety of schemes in place to help people to escape rental traps and their parents’ basements. However, the variety of schemes available can be bewildering, and this isn’t helped by the fact that they’ve all got similar names but very different rules. The right one for you will depend on your own needs and situation.
If you are saving for your first deposit
If you’ve barely got enough money left at the end of the month to buy yourself a celebratory Twix, scraping together a house deposit can look seriously unrealistic. Most mortgage lenders demand that buyers put down ten percent of the purchase price of the property as a deposit on a home, although some will offer mortgages – for a premium – if you have only five percent of the purchase price.
First-time buyers also have to budget for legal costs, moving costs and stamp duty – a tax payable if your property comes in at over £300,000 – so the total amount that needs to be saved can be very daunting, especially if rent is already eating up your pay packet.
However, if you have got a little cash left over for savings, two different types of accounts offer government incentives and can help you to accrue the cash you need.
The first of these is a Help to Buy: ISA, which was introduced in 2015. These accounts allow you to transfer across £1,200 in the month that you open the account, followed by £200 a month thereafter. When you come to use the money for a house deposit, the government will add 25 percent to the amount that is in the ISA, provided you have saved more than £1,600. The deal tops out at a £3,000 bonus on £12,000 of savings. You can use the proceeds from a Help to Buy: ISA to buy any property worth under £250,000, or £450,000 in London, and if you are buying as a couple and neither of you have owned a property before, you can both open separate ISAs and get the bonus, giving you a possible top-up of £6,000 on your housing deposit.
The Help to Buy: ISA can be opened until 30th November 2019, and you can contribute to one until 30th November 2029. Note that the bonus must be claimed by 1st December 2030.
The alternative to a Help to Buy: ISA is a Lifetime ISA. While the Help to Buy: ISA isn’t known as a HTBISA (perhaps it wasn’t catchy enough?), the Lifetime ISA is known as a LISA, which it makes it sound reassuringly like the smartest Simpson. LISA packs some serious punch. She was introduced this April to help people to save for both their first property and for retirement. You can put £4,000 into a LISA every year, and the government will top it up with a 25 percent bonus every year until you hit 50.
The maximum bonus that can be paid out on a LISA is far higher than Help to Buy: ISA, at £32,000 between the ages of 18 and 50. Other improvements on the Help to Buy: ISA include the ability to hold your money in either cash or stocks and shares, and the ability to withdraw it as pension income after the age of 60 if you do not use it to purchase a property.
However, the rules are strict. You can only open a LISA between the ages of 18 and 40, and you must hold the LISA for a year before you buy a property with it. There is also a five percent charge as well as the loss of bonus and interest if you withdraw the money at any other time.
This tax year, and this tax year only, you can transfer an existing Help to Buy: ISA into a LISA if it seems like a better deal for you.
With either product, if you want the government bonus to buy a home you must not have owned a property or a share of a property previously.
If you can’t afford to buy without help
Government help doesn’t end at deposits. New schemes have recently been introduced to give further help to those wanting to get on to the property ladder – one for brand new homes, and the other for those willing to look at shared ownership.
Due to an apparent shortage of financial product names in Westminster, the government schemes – like one of the ISAs – are both called Help to Buy, which can make the different types of help available look very confusing.
The Help to Buy: Equity Loan scheme applies to new-build properties only. With this scheme, the government lends you up to 20 percent of the cost of your newly built home, so you’ll only need a five percent cash deposit and a 75 percent mortgage to make up the rest. Within Greater London, the scheme will lend up to 40 percent of the cost. You won’t be charged loan fees for the first five years of owning your home. This scheme is available to existing homeowners as well as first-time buyers.
The Help to Buy: Shared Ownership scheme allows you to buy between 25 percent and 75 percent of your home, and to pay rent on the remaining share. To be eligible for the scheme your household must earn £80,000 or less a year, or £90,000 or less in London. You can be a first-time buyer, someone who used to own a home but can’t afford one now, or someone who is an existing shared owner looking to move. For more information on both Help to Buy schemes, you can visit www.helptobuy.gov.uk.
If you want non-government help
Away from the myriad options of Help to Buy, there are specialist non-government loans available that may make it easier for you to buy a property. If a family member is willing to help you to buy a home, but doesn’t want to sell the family silver, Guarantor Mortgages, Family Offset Mortgages and Family Deposit Mortgages are all worth exploring.
As the name implies, with a guarantor mortgage, the family member guarantees the mortgage debt and is liable for the payment if the borrower does not make it, usually offering their own property as collateral against the loan.
Family offset mortgages allow parents or grandparents to put their savings into an account linked to the child’s mortgage, thereby reducing the repayments. It’s not without its downsides, though –this arrangement may tie up their money for a long time.
Family Deposit Mortgages allow your family to deposit money as collateral against the mortgage as a form of guarantee. They still get interest on the deposit.
All of these mortgages carry risks for the family members involved and it is important that everyone understands the implications.
Other options that may make it easier to get on the property ladder include Longer Term Mortgages, which are simply mortgages that run for longer than 25 years, meaning that monthly repayments are smaller, although borrowers pay more interest overall.
With all of these schemes, it is important that you fully understand the options available and the risks involved. An independent financial adviser or mortgage broker will be able to help you look at your options.
So don’t lose heart. With a little boost you’ll be clambering up on that ladder in no time.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.