What lies ahead
Low mortgage interest rates and a raft of Government schemes have made getting a foot on the housing ladder easier for first time buyers in recent times. However, since Britain voted to leave the EU in June’s referendum, there are signs that the tide could be turning.
Fewer deals available
The number of mortgages available for buyers with a 5% deposit has fallen by 16% over the past five months, according to figures released by Moneyfacts. The lack of deals is due to concern over property values after the referendum.
The Coventry Building Society also withdrew its Step-up Family Mortgage deal for new applications on 28th July. This was a loan that allowed a parent or close family member to include their income on a first time buyer’s application. Coventry cited the reasons for the withdrawal as being the new 3% stamp duty hike for second homes. If a parent or family member was included on the title of the first time buyer’s property, this would be classed as a second home, attracting the higher rate of duty.
First time buyers will also no longer be able to take advantage of the Help to Buy mortgage guarantee scheme which has been running since October 2013. This scheme is due to end at the close of the year. Under this scheme, banks and building societies can purchase a government guarantee on mortgages up to 95% loan-to-value (LTV), for homes up to £600,000.
According to mortgage broker Anderson Harris, the signs that the housing market may be turning following Britain’s decision to exit Europe are there. Consequently first time buyers could see fewer deals until there is more certainty about what the market will do and until lenders feel more confident about their security. A further recent blow, although unrelated to Brexit, came for those using the Government’s Help to Buy ISA to save for a deposit. It is now clear that the 25% bonus offered (up to £3,000 per saver) is paid on completion rather than on exchange of contracts. Those affected have had to negotiate a smaller deposit and a larger sum on completion, or borrow additional cash.
Not everything is doom and gloom on the market. With the bank’s interest rates cute, mortgage rates are at an all time low. Moneyfacts puts the average two-year fixed rate on a 95% LTV mortgage at 4.04%. However, there are better deals to be had – Halifax is offering a Help to Buy guarantee loan at 3.39% fixed for 2 years with a £999 fee, and Nottingham Building Society is offering a two year deal at 3.29%, also with a £999 fee. Saffron Building Society has a five year fixed deal for 3.97% (new buyers) and Tesco has a 4.29% five year deal with no fee.
For those with a larger deposit, there are some fantastic rates available. However, brokers have noted that the gap between deals for a 10% deposit and deals for a 20% deposit may be closing. The latest best buys were Natwest’s 2 year fixed deal for a 20% deposit which charges 1.48% interest and a £995 fee; or Yorkshire Building Society’s 2 year fixed deal for a 10% deposit which charges 1.94% interest and a £1,475 fee. With deals for 10% and 20% LTV so close, it’s worth asking how much more deposit you need to raise to qualify for the next band. Otherwise you could miss out on a great saving when all that was required was a few hundred extra pounds.
The bank of Mum and Dad
Although Coventry has withdrawn its Step Up Family Mortgage, other lenders have deals that allow Mum and Dad, or a close relative, to give them a helping hand.
Barclays’ fee-free Family Springboard mortgage gives buyers a 2.79% fixed rate deal for 3 years with just 5% deposit, or 2.99% fixed rate with no deposit. To qualify for the deal, a family member must put 10% of the purchase price into a special bank account for three years. However, the account remains in the family member’s name and they get their savings back with interest after the 3 year period is up – provided the buyers do not default.
Parents also have the option of acting as guarantor for their child. To qualify, they would have to show that they could afford both their own monthly outgoings together with the mortgage payments that they are guaranteeing.
Joint mortgages present a further option where the buyer’s salary doesn’t stretch far enough. These are helpful if the parent is still working. However, parents need to look at any stamp duty implications – if their name appears on the title to the property, it will be classed as a second home and the 3% stamp duty hike will be payable.
Some lenders have pre-empted this problem and will allow just one name to appear on the title. These include Barclays, Metro Bank and Hinckley & Rugby Building Society. Having just one name on the title also helps sidestep the issue of capital gains tax which could arise on the sale of the property in future, given that it is not the parents’ main residence.
Buying more rooms than you need
Bath Building Society has come up with a novel mortgage that allows you to borrow more by renting out one of the rooms in your property to help meet your mortgage payments. According to their website, the Rent a Room mortgage might work as follows:
“An applicant earns £26,000 pa and wants to buy a two bedroom property for £200,000. They have a 20% deposit, so need a loan of £160,000. The applicant has a friend who is looking for somewhere to live, and is interested in renting the second bedroom; they do not want to buy a property together as they do not want the long-term commitment. The friend is happy to pay £400 per month to rent the spare bedroom. The applicant speaks with one of our Advisers who calculates that, with a Rent a Room mortgage, the rent would cover about £58,500 of the loan, leaving just £101,500 to be covered by the other income”.
Crucially the maximum loan to value is 85%, or 95% if the borrower has collateral.
Whether you are thinking about buying your first home and want to know what help is available to you, or you’re considering helping your child get a foot on the housing ladder, speak to our property team to make sure you’re fully aware of all the legal and tax implications.