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How to get a foot on the property ladder

Buying your first home may seem like an impossible dream. We look at the options for getting a foot on the property ladder.

Stop renting & start saving

Tenants paid a record £51.6bn in rent to private sector landlords in 2017 – more than twice the total bill in 2007, according to lettings network Countrywide. The proportion of owner occupiers aged 24 to 34 fell from 59% in 2004 to 48% in 2014, government figures show. If you’re fed-up with renting, the first step to owning your own home is to start saving. One option is to live with your parents (or move back) instead of renting your own place, making it easier to save.

How to get a foot on the property ladder
How to get a foot on the property ladder

Help to Buy: Isa & Equity Loan

Help to Buy Isas will kick-start your savings. You can pay up to £200 into Help to Buy Isa and government will boost your savings by 25%. So, for every £200 a month you save, there’s a bonus of £50. The maximum government cash you can receive is £3,000. Couples buying together can each pay into their own Help to Buy Isa, meaning a potential boost of up to £6,000 towards a deposit for a first home. If you want to buy a new-build property, Help to Buy equity loan scheme is another option.  This covers up to 20% of the purchase price, which means you’ll only need a 75% mortgage and a 5% cash deposit. If you live in London, you can borrow up to 40% of the purchase price. For more information on Help to Buy see our other information sheets.

Be flexible on location

In order to get a mortgage, you’ll need a deposit. Most lenders ask for a deposit of 5%-10% of the property’s value.  With the cost of the average home now £217,000, according to Nationwide figures for July 2018, that means a typical deposit is between £10,850 and £21,700.  For many, saving this money is the  biggest hurdle to home ownership. But there is a huge variation between the regions. First time buyers spent around £103,326 on a home in the north of England and more than £400,000 in London. So be flexible and consider buying your first home in a more affordable area.

Bank of mum and dad

For some lucky first-time buyers, parents may be able to help with finding the cash for a deposit. In 2017, generous parents lent or gave cash worth £6.5bn to help their grown-up children realise their home owning dream  – a massive 30% rise on £5bn the previous year, according to research by Legal and General. It puts the Bank of Mum and Dad on par with the UK’s 9th biggest mortgage lender. If parents gift money to their children, it could lower the amount of inheritance tax to be paid on their death if they live for seven years after giving the money away.

Guarantor mortgages

Asking your parents or close relatives to be guarantors on your mortgage can also work.  They don’t have to stump up any cash but it can increase the amount a mortgage lender is prepared to allow you to borrow. This doesn’t mean they will jointly own your new home, but they’ll be liable to pay your mortgage if you fall behind with the repayments. This isn’t an option to take lightly as the guarantor needs to be able to afford to pay your mortgage if you get into difficulty.  

Getting a mortgage

There are thousands of mortgages which are in theory available to first-time buyers. Banks and building societies also offer specific deals for first-time buyers, which may include incentives such as cashback, no product fees, free valuation or a contribution towards legal costs. In 2017, the average loan for adults aged 20-30 years old was £150,928 and for those aged 30-40 £197,276, according to Money Super Market.  Talk to several independent mortgage advisors as well as your bank or building society to help you find the best deal. 

Longer term loans

A typical mortgage lasts 25 years, another way to get a foot on the housing ladder is to extend the term of the loan to 30, 35 and even 40 years.   Longer-term mortgages reduce the amount you repay each month which makes home ownership more affordable. The downside is it will increase the amount of interest paid overall. For example, a 25-year fixed rate mortgage of £110,000 at 3% would involve monthly repayments of £522 and amount to a total of £156,600, assuming interest rates stayed the same. If extended to 35 years, you would pay £423 a month (£99 less) but end up paying £177,660 in total over the course of the term (£21,060 more).

Shared ownership

Shared ownership allows buyers to purchase part of a property from a social landlord, usually a housing association, and pay rent on the rest. With home ownership now unaffordable for many people on middle or low incomes, especially in London, shared ownership is a possible way for ‘Generation Rent’ to move forward.  Typically, you buy between a quarter and three-quarters of a property with an option to buy a bigger share at a later date. It offers a ladder to outright ownership, through ‘staircasing’ or buying shares up to 100% of its value.

Buying with friends & family

Buying a property with a friend or family member is an increasingly popular way of getting onto the first rung of the property ladder. The main advantage is you split all the costs. But it’s a huge commitment and everyone involved in the transaction is responsible for the mortgage payments, so if one defaults, the lender can chase either or both of you.  It’s not a good idea to go down this route without some form of written agreement, for example about what will happen if one of you wants to move and sell their share in future. Your solicitor can help you draw up the legal documents to protect your investment.

Right to buy

This is an option for tenants who rent their home from their local council in England, Wales and Northern Ireland. It allows those who qualify to buy their home at a discount. The size of the discount depends on where you live and the type of property. Usually, tenants must have rented from the public sector for three years before they can buy under these schemes. The Right to Buy scheme has been extended to include housing association tenants in England. In Scotland, the Government plans to end the scheme for all council and housing association tenants.

Starter Home Scheme

This is a new government plan to help first-time buyers buy a new build home with a 20% discount of the market price. The discounted price for these homes should be no more than £250,000 outside London and £450,000 in London. Aspiring homeowners can register their interest online now.

There are lots of options for would-be home owners to consider. But if you want to buy your own property a mortgage and some savings are pretty much essential.