FOR first-time buyers it's a case of giving with one hand and taking away with the other. While house price falls have made property more affordable, the supply of the mortgages that facilitate purchases has dwindled alarmingly.
First-time buyers on low incomes face little chance of getting on the ladder due to rising mortgage rates and deposit requirements, the Royal Institution of Chartered Surveyors (RICS) confirmed this week. The last 100 per cent mortgage has disappea
red and few 95 per cent loans are available, while the cost of servicing debt has risen.
This means the average first-timer couple in Scotland now need to save 74 per cent of their annual take-home pay to get on the ladder, said RICS, compared with a UK average of 21 per cent in 1996.
However, first-time buyers do have one thing going for them – falling house prices. This not only means that property is becoming more affordable, but puts buyers in a stronger negotiating position.
For buyers with deposits, this is great news, according to Scott Brown, a partner with Warners solicitors and estate agents in Edinburgh. "As long as you can afford the asking price, it makes sense to buy just now," said Brown. "There is less competition for properties, you have a wider choice and there is a chance to negotiate with sellers. But the upturn in prices will be quick, so if you sit and wait for mortgage rates to improve, as they will in due course, you will miss your chance."
But how can prospective buyers without deposits, or access to high loan-to-value mortgages, take advantage of increasingly affordable buying opportunities? Here are the options:
BANK OF MUM AND DADThe most traditional fall-back for buyers struggling to stump up the necessary cash – and still the most popular – is to go begging bowl in hand to parents or other family members. If you're fortunate enough to have parents who can help out with the deposit you also have a much better chance of getting a competitive deal.
According to research from The Children's Mutual, half of all parents expect to have to bankroll their children's first home, while 40 per cent of today's teens believe they won't be able to buy a home in the future without family help in building a deposit.
"For parents considering helping children buy their first home, the benefit of falling markets is that the relative amount of money you need to put down is less than a year ago," said John Postlethwaite, a consultant at Punter Southall Financial Services in Edinburgh.
Some parents have gone down the equity release route to help their children – unlocking equity from their own home – but this should only be done with careful consideration and advice.
GUARANTOR MORTGAGEParents can also help out through guarantor mortgages, where lenders base the mortgage on their income – rather than that of their children – when approving the loan. Most lenders have some form of guarantor mortgage, but Postlethwaite warned that parents are now being asked by some lenders to take on more responsibility.
"The guarantor needs to be able to support the whole mortgage, not just the additional amount, as well as their existing mortgage. So parents doing this need to have a low mortgage – or none at all – and a good income." The advantage to parents of guarantor mortgages is that, rather than stumping up the deposit themselves, they are encouraging their children to maintain their commitments. But legal advice is recommended regarding the implications of being guarantors.
ASSISTANCE SCHEMESThe most common scheme is shared ownership, where the occupier purchases a share – often around a quarter – of the property and pays a reduced rent on the remainder. Earlier this year the Scottish Government launched the Low-cost Initiative for First-Time Buyers (LIFT) scheme, which allows first-time buyers on low incomes to purchase a percentage of the property, with a housing association funding the rest as an equity loan. Another government initiative, Homestake, is a shared-equity scheme for new-build properties that have been allocated for low-cost home ownership.
Certain criteria need to be met in order to qualify for these schemes, such as a maximum income level.
More information can be found at www.communitiesscotland.gov.uk.
Increasingly, in a bid to offload vacant new-builds, some developers offer incentives to first-time buyers, such as 80/20 schemes, where they retain 20 per cent of the equity in the property, meaning buyers needed to fund just 80 per cent.
MULTIPLE APPLICANTSSome lenders allow up to four borrowers on a single application. In many cases lenders only consider the two highest incomes, whereas others take all four into account, but in either case the income multiple isn't simply arrived at by combining the salaries.
There are varieties on this approach, according to Lesley Canavan, general manager of the Edinburgh Solicitors Property Centre money management division. "It has become quite common for friends to combine where one may have the funds for a deposit but not necessarily the affordability to do it in their own name."
But aside from the potential conflicts arising from entering into a financial arrangement with friends, each borrower is responsible for the whole mortgage, not just their portion. This complicates matters in the event of one party leaving, as those remaining have to make repayments on the whole mortgage.
SAVEIf none of these options is open to you, or they just don't appeal, it's a good time to build up a deposit. Savings rates are at their highest for some time, with several fixed-rate bonds paying over 7 per cent and a number of cash Isas and savings accounts offering around 6.5 per cent. At the same time, house prices seem certain to fall further – if to a lesser extent in Scotland than elsewhere – so a few months on the sidelines taking advantage of the chance to build up a better deposit could make a difference for some first-time buyers.
"Work out how much you would need to save, how much you can afford to save and how long it will take you," advised Canavan.
BACKGROUNDTHIS time last year, buyers could still get hold of mortgages offering up to 125 per cent of the property's value. Now, not only has the number of mortgages available dropped sharply, but 100 per cent mortgages have disappeared completely, as lenders have moved to reduce their exposure to borrowers who could pose a debt risk.
Most lenders now ask for a deposit of at least 10 per cent, with just a small number of 95 per cent loan-to-value mortgages currently available, compared with well over a thousand a year ago, and they tend to be more expensive.
"You can still get up to 95 per cent but these deals have graduated in terms of cost and flexibility, with higher lending charges and higher interest rates" said John Postlethwaite, a consultant with Punter Southall Financial Management in Edinburgh. "The next level down is 90 per cent mortgages and the more deposit you have, the more competitive the deal you can get."
The full article contains 1205 words and appears in The Scotsman newspaper.
