It might be harder than ever to buy your first home these days, but it is possible. Here’s how…
At the end of 2020, the average house price had reached an all-time high, but if you’re trying to get your first steps onto the property ladder, don’t despair. There are still ways you can do it.
We find out more from mortgage adviser David Milbourn from Stringer Mann Chartered Financial Planners in Berkhamsted.
Remember the rules
One of the first mistakes people make when trying to work out how much they can borrow is that they forget about ‘affordability’ – but the banks don’t.
So while you might think that, because you can afford £1,200 a month in rent, that the banks will easily lend you that much, sadly you’re likely to be wrong.
There are three main rules to remember, explains David.
‘First, remember that for most average earners the bank’s loan-to-income ratio will never be more than five times your salary,’ he says. ‘Depending on your circumstances and the bank, it could be less.’ For example, you’re more likely to be offered a loan that’s four times your salary if you’re a first-time buyer with a low deposit of between five and 10 per cent.
Second, banks will consider more factors than just your salary when trying to work out affordability. ‘They will take into account the cost of living, and any unsecured loans you may have,’ explains David. ‘They will also make sure you would be able to pay that amount back if interest rates rose to 7 per cent, for example.
‘Third, they look at how sustainable your income is. So if you’re self employed or do contract work, they will decide whether they think your current income is sustainable, and either take into account an average for the previous three years or the most recent annual income.’ Commissions and overtime are also likely to be averaged and often must be supported with a P60 showing consistency of earnings.
But there are other ways to buy:
Help to Buy Equity
This is a great option for first-time buyers who might have a decent income, yet have no substantial deposit.
If you are earning decent money, but paying high rent, you may not have had the chance to save a big deposit. This scheme could help.
The Help to Buy scheme is basically a government loan of 20 per cent of the property price (40 per cent in London) on new-build homes only, which is interest-free for the first five years. If you then pay it back you’ll never pay interest on it; although you will still owe 20 per cent of the future value, otherwise you will pay interest on it for the next 20 years until it must be repaid in full.
‘This could be the difference between being able to afford to buy your own home and not,’ says David.
This can be a great option for low or single income families,’ says David.
You can choose to buy a percentage of the property, while a housing association owns the rest and you pay them rent. You can choose to increase your percentage as and when your income rises. This can sometimes also be on a new property; a house builder will build a new development and the housing association will buy a percentage of those properties to offer as shared ownership properties.
‘Some people don’t like the idea of this as it means you’re still paying rent. But this is a great solution because it means you’ve made the first step onto the ladder. It means you can buy a much nicer house than you would be able to afford without this scheme, and you’re also able to ‘staircase’ the amount you own – in other words, if your income goes up, you can choose to buy a larger percentage of the property, usually up to 75 per cent.’
As the price of the property goes up, so does the value of the percentage you own. It also enables people to have stability rather than the uncertainty of renting.
* Stringer Mann can offer a wide range of first charge mortgages from across the market, made available to intermediaries for which they are paid a procuration fee by the lender. Visit www.stringermann.com to find out more.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Stringer Mann Chartered Financial Planners is an Appointed Representative of and represents only St. James’s Place Wealth Management Plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website at www.sjp.co.uk/products.