Getting on to the housing ladder – 5 options you might not have considered

According to recent predictions from a specialist buy-to-let mortgage lender, Kent reliance, the value of the private rented sector will break the £1 trillion barrier in 2015 1.

By Ben Gosling of turnkeymortgages.co.uk

By Ben Gosling of TurnKey Mortgages

 

Indeed, though it is a long way from overtaking it, the rented sector is growing far more quickly than the owner-occupied sector. The percentage of owner-occupied households has fallen steadily since the recession, from 68% in 2007 to a little over 64% today – a fall that represents nearly half a million properties 2.

The crux of the problem is, of course, affordability. According to the most recent data from the Office for National Statistics, house prices have increased an average of 4.7% year-on-year in the last decade, and 2.0% year-on-year since the recession 3, well in excess of wage growth.

Yet our desire to have a place of our own – something that seems entrenched in our national psyche – is indefatigable. As well as the various government schemes that are in place, there are numerous ways to get on the UK housing ladder. Here are a few that you may not yet have considered:

Gifted deposit

You may be fortunate enough that you have a close relative who is able and willing to contribute towards your deposit. This is known as a family gifted deposit.

Developers also ‘gift’ deposits by offering a discount – usually around 5% – from the market value of the property. The loan to value (LTV) ratio is still calculated against the market value.

For instance, a home building company might offer a 5% deposit gift on a new-build home worth £200,000, meaning that you only need to pay £190,000. This is effectively £10,000 towards your deposit, even though no money has yet changed hands.

Gifted deposits are not something every mortgage lender will consider, as many generally prefer to see evidence that you are able to afford a mortgage yourself. The important thing to remember is to ensure that the lender is aware that a gift or incentive is involved in the transaction – your conveyancer can help to make sure that all the relevant paperwork is complete.

Guarantor

Not every family member will have the cash to pay for some or all of a deposit. But if they want to help, and they have spare equity in their own home, they can offer the lender a charge over some of that equity as security for your own mortgage. This makes them a ‘guarantor’ for your mortgage.

With this option, your guarantor’s income and expenditure will also be factored in to your application.

This is a risk for both parties. Using this option to borrow at very high LTV percentages will increase the size of your repayments, and puts you at risk of falling into negative equity. If you fall behind on your mortgage repayments, your guarantor will become liable for them, putting their own home at risk of repossession.

Longer mortgage term

Average mortgage terms are growing. In the 1990s, less than 5% of mortgages taken out had terms exceeding 25 years; in 2013, the figure was over a third 4.

Having a longer mortgage term means that the amount you need to pay is spread out, reducing the size of your monthly repayments and making it more likely that you will pass a lender’s stringent affordability checks. Beware, though; this option will mean repaying more interest overall, as it will have more time to build up.

If your extended term will take you past retirement age, many lenders will want to see evidence that your retirement income will cover the repayments, whilst some lenders won’t allow it at all.

Joint mortgage

By pooling your resources with (typically) up to three other individuals, saving up for a home becomes that much easier.

This option helps with loan-to-income and affordability checks, though most lenders will only consider the two highest-earning applicants’ incomes. The main appeal of a joint mortgage is how quickly they enable you to save up for a deposit.

Joint mortgagees will either be ‘joint tenants’, who collectively own and are liable for the property, and ‘tenants in common’, who each own and are responsible for their own share, which may or may not be equal.

Whatever the case, you will have entered into a binding financial and legal agreement with other people, who are also at risk if you find yourself unable to keep up your mortgage repayments. Like a guarantor mortgage, you should approach this option with care, and ensure that every party is completely happy with the arrangement and aware of their obligations and risks.

Shared ownership

Local housing associations offer shared ownership schemes that enable first-time buyers to purchase a ‘share’ of a leasehold property that is worth at least 25% of the total value. The share is financed in through a combination of a deposit and a mortgage, just like any other purchase, but the amount required is significantly lower. You then rent the remaining share of the property from the housing association.

You and the housing association share any increase in (or loss of) equity, as well as the proceeds from the sale. You are also allowed to purchase a larger share when you can afford to do so. This is called ‘staircasing’.

The biggest risk with this option is that you owe money to two parties – the lender who provided your mortgage, who can repossess your share if you fall behind on repayments, and the housing association, who can evict you if you fall behind on rent.

There are only a limited number of shared ownership schemes at any one time. This option is usually only available to households earning less than £60,000 per year (£80,000 in London), and existing local authority and housing association tenants are given priority over other applicants.

Find out more about shared ownership schemes from the Gov.UK website.

Sources

[1]      http://www.financialreporter.co.uk/mortgages/btl-property-to-hit-1-trillion-in-2015.html

[2]      Table 101: by tenure, United Kingdom (historical series) [XLS]. Retrieved from https://www.gov.uk/government/statistical-data-sets/live-tables-on-dwelling-stock-including-vacants

[3]      House Price Index, June 2014: Annual Tables 20 to 39 [XLS]. Retrieved from http://www.ons.gov.uk/ons/rel/hpi/house-price-index/august-2014/stb-august-2014.html

[4]      Ibid

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.

 

 

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