2020 was, as everyone knows, a difficult year. Help was at hand for homeowners as all major lenders offered up to 6 months Mortgage Holidays. However, this generous payment break has affected the lenders, who, understandably, have reduced the mortgage products they have available.
Unfortunately, this has impacted first time buyers as the biggest squeeze has been on high loan-to-value mortgages, meaning the mortgage products currently on offer require a larger deposit.
The reduction in high loan-to value mortgages has affected first time buyers disproportionately because unlike other buyers they do not have equity in an existing property which could be used towards the deposit, making finding the 10 – 15% average deposit quite a bit harder. Many first-time buyers had saved enough deposit for the higher LTV mortgages before the first national lockdown and would have been in a position to purchase, but the tightening of mortgage offerings has led to there being very few mortgages with an LTV of over 90% and many that are left have relatively high interest rates associated with them to offset the risk.
Whilst first time buyers may feel priced out of the market, there is help to be had with that crucial first step onto the property ladder:
- The Government help-to-buy scheme allows purchasers to get onto the property ladder with a 5% deposit. Using this scheme will help first time buyers bridge the gap between the lower LTV mortgages and the deposit they have managed to save. In essence this scheme, when buying a new-build property, sees the Government or Housing Associations buy in to the property. There are currently three types of help-to-buy schemes:
Shared Ownership. This scheme allows you to buy a share of a property, from 25% to 75% and pay rent to the owner of the remaining share. You can buy more shares over time to increase your stake in your home. Typically, the other stakeholder in your property will be a housing association. All shared ownership properties are leasehold so there might also be service charges and other leasehold outgoings. Ensure you fully understand these charges before opting for this scheme. The advantage with the scheme is that any potential buyer can buy their own home with just a small initial outlay.
Equity Loan: This scheme is changing in April 2021 but allows those buying a new build property to borrow from 5% to 20% of the property value from the government. They then only need a 5% deposit themselves but will still, ultimately have a 10% – 25% deposit which allows them access to many more affordable mortgages. There are regional limits on the property value so make sure you do your homework on the details of the scheme. - Gifted Deposits. Although some lenders are clamping down on these, they are a way of getting together a larger deposit more quickly. In essence, someone you know gives you the deposit money and signs a declaration that they will not ask for the money to be returned and will not have a stake in the property being bought. This gifted cash then goes towards the deposit. Be careful with this, however, as should the person giving you the money die within 7 years you may be liable for a sizable inheritance tax bill.
When considering any of these very helpful schemes or a gifted deposit, talk to an independent financial advisor to ensure you fully understand the financial implications and obligations.
The final bit of positive news for first time buyers is that most experts believe, with the roll out of the vaccines and as the world returns to normality, lenders will start opening up the higher LTV mortgages.
So, although the market does, at first glance seem tough for first time buyers, there are plenty of ways of accessing more funds to gather a larger deposit together to enable you to get on the property ladder.
