Figures from the Council of Mortgage Lenders show that only 174,000 people have stepped on to the housing ladder in the first six months of this year, compared with 253,000 in the same period last year.
The cost of property is putting many people off. The average person will pay £92,528 for his or her first home, or three times typical earnings, according to Halifax. The average deposit is 19% of the property price, or about £17,580. In London, first-time buyers are forced to put down as much as £30,000.
First-time buyers help to keep the housing market buoyant. If they stay away, the market could slump.
The annual rate of house-price growth is already falling. Nationwide building society’s latest survey found that prices rose 1% in July — an annual increase of 17.9%, down from 19.2% in the year to June.
Alex Bannister of Nationwide says: “The generally high level of house prices, deposit requirements and some employment uncertainty are combining to dampen activity, particularly for first-time buyers.”
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Nationwide expects growth of about 10% this year, but other experts are less optimistic. Jonathan Loynes at Capital Economics, a consultancy, says: “We are expecting an annual increase of 8%, but we think prices will fall by 8% next year.”
If you are postponing the decision to buy in the hope of house-price falls, some experts believe you will be disappointed. Ray Boulger at Charcol, a mortgage broker, says: “The scare stories about a crash are unfounded. Today’s low mortgage rates compensate for higher prices. Most people who held off from buying a couple of years ago because of similar concerns are regretting their decision.”
We look at schemes that can help you or your children to get on the first rung of the property ladder.
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Many parents give children money for a deposit on their first home. Their generosity costs them an average of £8,000, according to research from Skipton building society.
Helping out can also be a useful tax-planning tool for grandparents. Your estate is liable for 40% inheritance tax if it is worth more than £255,000. You can give any amount of money away to reduce the value of your estate, free from IHT, if you live for another seven years. You can also get rid of £3,000 a year tax-free, without having to worry about the seven-year rule.
An alternative would be to give your grandchild regular cash gifts, rather than a lump sum. John Whiting of Price Waterhouse Coopers, an accountant, says: “You can give away as much as you like, so long as it does not affect your standard of living. It also has to be a regular occurrence, so that is looks like part of your monthly outgoings. So rather than offering a lump sum for a deposit, you could pay your child or grandchild’s mortgage for a few years.”
Many banks and building societies will lend only 90% of the property’s value. If you borrow more you will probably have to pay a mortgageindemnity guarantee (Mig).
A Mig is a single-premium insurance policy that protects the lender if it has to repossess your property and sell it for less than the outstanding mortgage.
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Migs can be expensive and lenders add to the cost because of the way they arrive at the premium. If, for example, a Mig kicks in at 90%, it will be calculated on the amount you borrow above 75%. So if you borrowed £95,000 for a property costing £100,000, the Mig would be calculated on £20,000. The cost of Migs varies, but you could typically expect to pay about 7% — £1,400 with this example.
David Hollingworth of London & Country, a mortgage broker, says: “It often works out cheaper to go for a lender that has a slightly higher rate but doesn’t charge a Mig.”
For example, Britannia building society has a two-year deal fixed at 3.44%. However, if you have a deposit of only 5%, you will be charged a Mig. On a £95,000 interest-only loan for a £100,000 property, the Mig would be £1,920. The deal also has an arrangement fee of £299 and a valuation fee of £210. Over the two-year term your repayments, including all charges, would total £8,965.
If you went for Co-operative Bank’s two-year fix you would pay only £7,821 over two years, even though the interest rate is higher — 3.89%. The arrangement fee on this loan is £300 and there is a valuation charge of £130, but there is no Mig.
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Woolwich and Newcastle building society offer family-offset mortgages that allow you to link your savings to your child’s mortgage. For example, if your child had a £100,000 mortgage and you had £10,000 in a linked savings account, he or she would be charged interest on only £90,000. But the monthly repayments would be based on a £100,000 loan, so your child would automatically overpay each month and therefore clear the debt more quickly.
Boulger says: “Offset loans are aimed at parents who want to help their children but may need to draw on their savings. If you can afford to give your child a deposit, there are better loans available.”
Interest rates on offset deals are higher than on standard loans. You therefore need a large amount in the savings account to make it worthwhile.
For example, the Woolwich Offset Together mortgage charges 0.85 percentage points above the base rate for the term of the loan, giving a current interest rate of 4.35%. Staffordshire building society, however, has a two-year standard discounted mortgage with a current pay rate of 2.75%. You would need almost £36,000 in savings to make up the difference between the two rates, based on a £100,000 interest-only loan.
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Most offset deals require a deposit, but Newcastle has launched a scheme that is available Mig-free for 100% loans, available direct or through brokers Charcol and The Marketplace. It is fixed for five years — and the willing relative has to lock his or her savings away for the term.
Suppose a first-time buyer has no deposit, can secure a mortgage for £90,000, but needs £125,000 to buy a property. A parent could put savings of £35,000 in the offset account for five years. The child would be able to get a loan for £125,000, but would make repayments based on a £90,000 loan. The rate, however, is relatively high at 4.64%.
Most mortgage companies will lend between 3.5 and 4 times salary for single applicants, and 2.75 times income for joint-mortgage applications.
The average flat now costs £117,500 according to figures out last week from Hometrack, a property website, so many people may find they are unable to get a big enough home loan.
Some lenders may stretch these multiples. Mark Harris at Savills Private Finance, a broker, says: “Lenders have published criteria but in the right situation and for the right person, some will be more flexible.”
Alternatively parents can act as a guarantor enabling their child to get a larger loan. They must usually have enough income to support their own mortgage as well as that of their son or daughter.
If you have a 25% deposit, most high-street lenders will allow you to take out a standard loan with a guarantor. However, with smaller deposits the choice is more limited.
Royal Bank of Scotland, Scottish Widows and Newcastle building society offer specialist guarantor loans. The Newcastle and Scottish Widows schemes insist only that the guarantors’ income covers their own mortgage and the difference between the amount their child can borrow based on his or her earnings and the size of the loan.
The Scottish Widows deal tracks the base rate minus a quarter of a point for the first six months, giving a current pay rate of 3.25%. It then tracks the base rate plus 1.25 points for the remainder of the term — and there are no redemption penalties. The Newcastle rate is less competitive — it is fixed at 5.99% for three years.
Some lenders are more generous to graduates and professionals. Scottish Widows has a graduate mortgage that enables you to borrow 102% of the property’s value. It also offers a professional mortgage to people such as doctors, dentists, vets and solicitors. They can borrow up to 110% of a home’s value.
Scottish Widows’ professional mortgage is fixed at 4.29% for two years, while its graduate deal is a variable loan that charges a quarter of a point below base rate for six months and then 1.25 points above the base rate for the rest of the term.