Home help for first-time buyers
If you’re a first-time buyer and you are not lucky enough to have a large deposit the chances are that you have heard of Help to Buy. The government scheme, launched in March 2013, offers two routes into home-ownership for borrowers looking for 95 per cent loan-to-value (LTV) mortgages: an interest-free loan on a new-build property or a mortgage that comes with a taxpayer-backed guarantee.
However, while these options are worth considering, they are not your only choices. The spotlight has been on Help to Buy, but away from its glare lenders are offering other sorts of homeloans targeted at people like you. Mortgage rates Help to Buy mortgage rates are not bad – for example, Halifax’s start at 5.19% for a two-year fixed-rate deal, subject to a £995 fee, while Santander is offering a two-year tracker at 4.99% and a five-year fixed-rate deal at 5.49%. But to get one of these loans you will need to be able to put up the 5% deposit and to be able to show you can afford the repayments each month even if interest rates rise markedly.
Since the Mortgage Market Review (MMR) rules came into effect in April 2014, lenders must subject borrowers to ‘stress-tests’, to check that they can afford loan repayments even if rates rise, and many are testing affordability at interest rates of 7.0%. Borrowers who might struggle to afford that kind of loan may need some help – and this is where some of the other first-time buyer deals come in.
One option is Woolwich’s Family Springboard mortgage, which allows a borrower to use a relative’s savings as security against their home loan. This means the lender is happy to offer a lower mortgage rate – currently it is 3.99%, fixed for three years – which in turn means more affordable monthly repayments, and more chance of passing the MMR stress tests. To get this mortgage you will need to have a 5% deposit and parents, or another relative, willing to put 10% of the purchase price of your home into a savings account which cannot be touched for three years.
After that time, they will get their cash back plus interest (currently 2%) and you will move onto Woolwich’s Standard Variable Rate (SVR) or be free to remortgage to a new deal. The mortgage is cheaper than those available through Help to Buy, and as a result it should be easier to prove that you can afford it. Rather than giving you cash a family member could use the same savings to help you buy somewhere then later help someone else.
However the savings commitment – £20,000 on a typical first-time buyer property price according to the ONS’s index – will rule it out for some families. An alternative, says Stuart Gregory, managing director at Lentune Mortgage Consultancy, is Aldermore’s Family Guarantee loan.
“This does not require a lump sum to be provided by the guarantor, but a legal charge against their own property,” he explains.
This allows relatives to help both first-time buyers and movers without needing any ready cash – instead, Aldermore is listed as a second charge against the guarantor’s property (their own mortgage lender has first charge). The mortgage also does away with the need for any deposit. “This particular mortgage is available up to 100% borrowing if required – although care should be taken when considering loans of this proportion,” says Gregory.
Rates on the mortgage start at 5.48% fixed for two years and the applicant has to show they can afford the monthly repayments on the whole loan, so this won’t be an option for borrowers on a low income.
Aldermore also applies an age limit on the guarantor – they cannot be older than 70 at the end of the 10-year guarantee period – which may rule out some family members.
Bath Building Society offers a similar deal through it Parental Assistance Mortgage Scheme, but with an option that makes it even more useful: in some circumstances the society will take into account rental income when assessing affordability. That means you can use a lodger’s rent to help you buy.
The scheme involves your parents guaranteeing up to 25% of the value of your property with their home, and their own mortgage, if they still have one, must not be more than 65% LTV. Your home must be within 30 miles of your workplace, but can be anywhere in England and Wales. The rate on a 100% mortgage is fixed at 5.29% for three years, at 95% you can opt for a three-year variable or fixed rate, both set at 4.29% .
“These deals can be a useful option for those families where Mum and Dad would like to help their child get on the ladder but don’t have a large pot of cash that they can afford to gift to the child,” says David Hollingworth of mortgage brokers London & Country.
“However it is important that the parents understand that by using equity as security there is a chance that they could put their property at risk in the worst case scenario. They should also understand how long that commitment will last – with Aldermore it could last up to 10 years.”
The newly launched Family Building Society offers first-time buyers with a range of options: they can use a relative’s savings or property equity to help secure a 95% mortgage or a combination of both. Relatives can opt to receive interest, or forego it and reduce the size of mortgage that the buyer pays interest on.
However, the amount they need to stump up is higher than on the Woolwich mortgage – the total secured on property can only be 75% LTV, so a buyer with a 5% deposit needs someone to deposit the remaining 20%. The society, which is owned by National Counties Building Society, offers its Family Mortgage and Family Offset on properties costing £125,000 or more.
The three-year fixed rate costs 3.99% while the five-year deal is set at 4.39%. Gregory says many of the clients he deals with are unaware that these different deals exist.
“Such innovation from lenders should be welcomed – and encouraged. It would help greatly if lenders promoted the schemes to a wider audience,” he says.
Hollingworth adds: “Those that have 5% to put down may not have to rely on parent’s help now that Help to Buy has led to more 95% mortgage options on the market. However interest rates remain higher on a straight 95% LTV mortgage.”