With house prices soaring in some areas of the country and some 250,000 homes costing £1 million or more according to Lloyds Bank, first time buyers are facing an ever increasing struggle to get a foot on the housing ladder. The Government’s mortgage guarantee scheme is due to end next month, another blow to young people who need support to buy their first property.
According to data from the Council of Mortgage lenders, first time buyers must now save an average deposit of £25,970. However, this average doesn’t reveal the huge variations that can be found across different regions. Buyers in London need an average deposit of £76,700 – while buyers in Yorkshire and Humberside only need to raise £17,900.
For those living in London and earning an average wage, typically mortgage payments can be as much as 60% of their take home pay. This is significantly higher than the long term average of 45% of take home pay.
One solution is to buy a home with a friend, thereby doubling your purchasing power. Adrian Anderson of Mortgage broker Anderson Harris has noticed an increase in the number of people who are getting together with friends to buy a house. He notes: “It is extremely challenging for a first-time buyer to purchase on their own, while two salaries and deposits can go considerably further.”
However, if you decide to go down this route, it is essential that you have clear legal and financial arrangements in place setting out your obligations. Even the best of friends fall out at times! Key points to remember include:
Have a legal agreement – a ‘declaration of trust’ – that sets out who has contributed what and how the sale proceeds would be split if you decided to sell in the future.
Usually friends would hold the property as ‘tenants in common’ so each has a definable share. The alternative option – ‘joint tenants’ – would mean that each person owns 100% of the property and should one die, the other automatically continues to own 100% of the property. This will not be desirable in most cases where friends are buying together.
Consider how long you both expect to own the property for and what would happen if one person wants to sell and the other doesn’t. What would happen if the party wanting to stay could not afford to buy out the other person’s share? What would happen if one person wanted to move out and then rent out their room? Record your decisions in a legal agreement so there is no doubt in the future.
Consider how you will split the costs of the property, including general bills, repairs , decoration and furnishings. How will you make a decision if one of you wants to, for example, replace an item of furniture or an appliance, but the other doesn’t agree?
Try to raise the biggest possible deposit that you can between you as this will make your mortgage payment cheaper. It doesn’t matter if you put uneven amounts in to the property as you can record what you have contributed/agreed in the Declaration of Trust.
An increasing number of mortgage companies – 245 – will accept a 5% deposit. Rates for those mortages are higher than for a bigger deposit but they are still affordable – typically around 3.95% for a 2 year fixed deal or 4.48% for a 5 year fixed deal. However, the maximum income multiples that lenders use to calculate how much you can borrow still apply – so a 5% deposit may limit your total purchasing power.
Another possibility is to use the Help to Buy Equity scheme but this only applies to new builds. Shared ownerships are also an attractive option – these are typically offered on new builds, and managed through housing associations.
Finally, the bank of mum and dad is always worth a try – they may be willing to be a joint borrower with you on the mortgage. However, be careful – you will need to make sure your lender is willing to list you as sole proprietor of the property – otherwise you’ll be liable for 3% extra stamp duty as your purchase will be considered a ‘second home’ for your parents. If your parents have savings, Springboard mortgages are also worth a look – lenders will fund your purchase without a mortgage if a parent or family member deposits 10% of the purchase price with them for 3 years as security against you defaulting on the payments. The money is paid back with interested, provided that you don’t default.
Struggling to get on the housing ladder? Speak to our property team for advice.