Self-employed? In debt? Low savings? Fear not. Your chances of getting a foot on the property ladder are more realistic than you think.
You know the Big Yellow TeapotPlay House which took pride of place in your bedroom when you were little? The one with the tiny people, paintedon sofa and kitchen dresser?
Of course you do, because that’s starting to look like the closest thing to a home you’ll ever own. Saddening, not least because it’s a teapot. And you bought it when you were five.
It’s a disheartening prospect that after decades of hard graft, a push up the corporate ladder and years living in hovels masquerading as professional house-shares, you’re still in no financial shape to buy a property. We’ve finally emerged from a grinding recession to find the green shoots of recovery are taking root everywhere but housing.
“I can’t see how I will ever own my own house,” says researcher Sian Davies, 34, who rents a studio in Greenwich, London. “My parents don’t have a lump sum for a deposit and saving is virtually impossible. House prices are getting higher – it’s increasingly discouraging.”
According to the Land Registry, prices in London are going – to put it bluntly – nuts, up 18% last year to an average £458,000 (according to londonpropertywatch.co.uk a two-bed in Clapham, south London now costs upwards of £500,000). Elsewhere, in Manchester, prices are up 2.4% to an average £104,244 and in Birmingham prices are up 2.7% to £114,453.
Overall, first-time buyers must now pay 10.5% more for a property than they would have 12 months ago. These are colossal figures, especially when you consider that your mortgage is based on your disposable income. And with a report out last week stating that salaries are rising in line with inflation but no more, it’s a problem that is likely to go on. Housing charity Shelter recently calculated that if wages had kept pace with house-price rises since 1997, the average salary would be £55,296. In reality, the average UK salary is less than half this.
Despite this, most of us still want to buy. Yet, Generation Rent is welcoming more and more members. “There has been a 41% fall in the levels of home ownership among under 35s since 2001,” says Lucian Cook, director of residential research at estate agents Savills.
So is it worth scrimping and saving to buy a house? In investment terms, yes it is. Property tends to outdo most other forms of investment over a couple of decades, and in the immediate future, Cook forecasts prices will rise by 25% over the next five years.
In fact, a report last week revealed that a would-be buyer would have to be on a salary of at least £96,308 (the top 10% of earners in the country) to take home £63,000 a year – the amount the average property makes annually.
But periods of strong property growth tend to be followed by price falls. Nobody knows when the next crash will happen, but considering we are now in what experts are calling a ‘super bubble’, it will happen, which means in stark terms, you should only buy a home you are confident you could live in for several years to ride out any potential falls in value.
But with a steady approach and a touch of luck, everyone could buy their own home. Read on to find the scenario that fits your situation, and prepare to secure that fabled set of keys.
How to buy a home
“I’m not bringing home six figures”
If you live in an expensive area and don’t have an income to match, shared ownership might be for you. This subsidised system, which only applies to new-build developments, is available to many, with a couple of provisos.
Emma Maddick, head of marketing at Notting Hill Home Ownership (nottinghillhousing.org.uk), says individual schemes have minimum income requirements, based on the cost of the property, to make sure you have enough money to pay the mortgage. This requirement is usually around £30,000 gross household income in London (less in other cities).
But you can earn too much to qualify; more than £66,000 household income (for a flat) or £80,000 (for a family sized home). “There’s confusion about who is eligible for shared ownership properties, and the reality is that the average income in London is £37,000, which means the majority of people in London could potentially qualify,” said Kush Rawal, assistant director at Thames Valley Housing Association. So how does it work? You buy between 25% and 75% of the property, which means your mortgage and deposit requirements are less. You then pay the housing association rent (up to 3% of their share of the property value).
There will also be a service charge but it will still be cheaper than a mortgage. Although you only own part of the property, the most notable benefit is that you can stay in the property as long as you like, do what you like with it and have the option to buy a larger slice of your home in the future. And when you sell, you split the proceeds with the housing association.
Interested? Register with sharetobuy.com. You can find out which housing associations offer shared ownership in your area through your local council. Another option is to join forces with friends. But solicitor Peter Rodd advises getting a lawyer to draw up a ‘Declaration of Trust’ (around £400), setting out in detail exactly what your agreement is.
“I’m self-employed. What should I do?”
Not everyone works a regular nine-to-five job or pays PAYE. In fact, according to the Office of National Statistics, the number of people identified as self-employed has increased by almost half a million since 2008, representing around 14% of the total labour market.
Whether you work for yourself, own your own business, are a subcontractor or freelancer, the fact you don’t earn a steady month-by-month income can present more mortgage hoops to jump through than your wage-slave friends.
Ten years ago, self-employed workers could get a selfcertification mortgage, where you simply told the bank how much you earned without any proof. Now, most banks expect self-employed workers to be able to provide at least two years’ worth of accounts to validate their income, so keep your bank statements and invoices in a comprehensive filing system as well as your HMRC tax-return documents, as all your in-goings and outgoings will be scoured to prove you earn what you say you do.
Even if you supply all this evidence of earnings, banks may still consider you a risk and be hesitant to lend. This can leave entrepreneurially minded buyers out in the cold or, if you are approved, you may find yourself being asked for a bigger deposit than your salaried colleagues.
If you’re on “zero hour” contracts or have an income based on commission, you can get mortgages; but you will need to provide evidence to show how much you earn. As with freelancers, the lender will calculate what it thinks your average earnings are and base a mortgage offer on that.
Part-timers, meanwhile, are treated the same as full-time staff, although since they probably earn less, they will probably be offered less. The only people, says mortgage director Craig McKinlay, who won’t be considered for a mortgage are those on benefits.
“I don’t have a deposit”
According to myhomemove.com, the average UK buyer needs a 28% deposit but if you don’t have £50k sitting in the bank, there are options. The Government’s Help To Buy scheme (helptobuy.org.uk) was set up last April and allows first-time buyers (FTBs) to buy a property with a 5% deposit. It is now offered by most high-street banks and has largely overtaken property developers’ individual offers to FTBs.
Through Help To Buy you can also apply for a government backed equity loan. You will still need to raise 5% but you can get an extra 20% meaning you only need a 75% mortgage. The loan is interest free for five years; after that interest is 1.75% – cheaper than most mortgages.
There are also many offers for FTBs on new developments. David Galman, sales director at Galliard Homes, said that they will let FTBs pay off their deposit in stages. It is also worth negotiating – some developers will pay your stamp duty, legal fees and throw in furniture and white goods. Others have gimmicks such as free travel passes or gym membership. You could – in theory – take out a bank loan to pay a deposit but you’d have to manage repayments on top of mortgage costs – and convince your mortgage lender as well, as loan repayments would lower your disposable income.
The sensible way out of this catch-22 is to wait and save. Calculate what you need to save and figure out what you can sacrifice to achieve your savings goal. Moving into your parents’ house is an obvious way to cut costs if possible.
Alternatively, you could move somewhere cheaper in the short term. You can also haggle over the price of the property. According to Hometrack, homes currently achieve 96.2% of their asking prices (although, again, in certain London boroughs, they can go for up to 10% over). This means that offering around 5% below asking price is sensible (ask your agent about how low the owner would be willing to go). And don’t assume that prices for new-build flats are fixed – developers are likely to offer a reasonable discount too, particularly when they’re trying to shift the last few flats in a scheme.
There are one or two smaller lenders (such as Aldermore at 5.48% or Bath Building Society at 5.29%) who will offer 100% loans. In return they tend to charge higher interest rates and usually demand your parents act as guarantors which means that if you default on payments they will have to step in, so handle with extreme caution.
“Help! I’m In too much debt to buy”
So you’ve made practically no dent on your student loan, your credit cards are maxed-out and you took out a graduate loan when you left university and have regretted it ever since.
Don’t despair. Debt, according to Craig McKinlay, isn’t the end of the world. “Almost everyone has a bit of debt,” he points out, but what it does mean is that you may not be able to borrow as much as you want. Mortgage offers are now based on how much disposable income you have every month once your basic expenses have been paid and debt repayments gnaw into that.
Lenders will ask about any loans and credit cards you have and not disclosing these is against the law. Mortgage fraud can lead to a custodial sentence.
Once you’ve been truthful your broker or lender will, in turn, let you know what you can borrow. If it’s not enough to buy the sort of property you’re after, you’ll have to tackle your debt head-on before you can buy or see if you are eligible for any other schemes such as shared ownership. The best thing is to pay off your most expensive debt first. So if you have a loan with high APR, it needs to be the first to go. Look into consolidating debts in order to pay the lowest rate possible, and shop around for the cheapest interest rates you can find. Moneyadviceservice.org.uk can help you manage what you owe.
What else do I need to know?
Stamp duty, leasehold, fixed-rate mortgages. It’s like learning another language. Here’s a helping hand…
The truth about mortgages
Post-recession, banks are nervier and the smallest deposit that big lenders will accept is 5% although some smaller lenders are offering 100% (for current rates see moneysupermarket.com). But the amount you have as a deposit will make a big difference to your interest rate. Buyers with a 5% deposit can expect to pay interest at about 5.2%; with a 40% deposit, they would pay around 2.5%.
The other big change is that banks base offers on affordability, not earnings. They will work out what you have left over at the end of the month, and calculate the amount you can borrow from that.
Roughly, as it stands, for every £500 you can pay each month, you’ll be able to borrow £100,000. Traditionally, mortgages are repaid over 25 years but if you take a 30-year loan it will make repayments cheaper (although more expensive in the long run). If you borrow £180,000 at 5% over 25 years, your monthly payments would be £1,052. Over 30 years, payments would be £966 but you pay back more overall. Here’s a round up of all the mortgage types.
Repayment: FTBs are only likely to be offered this. It means their payments will repay the interest and the debt.
Interest-only: Mortgages where you only pay back the interest on the amount you’ve borrowed are now only available to buyers with huge deposits or collateral they can borrow against.
Fixed: Most people choose to fix their mortgage to an agreed interest rate so they know what their outgoings will be.
Variable: These go down or up to reflect the interest rates. As rates rise, so will your payments.
Leasehold vs Freehold
A leasehold property means a freeholder owns the ground the house is built on and when the lease runs out, ownership reverts back to them. Check how many years are left. If it’s less than 80 years, negotiate a lease extension into the final cost as a condition of sale. Securing a longer lease is vital as properties with leases under 80 years are a risky purchase.
Get Your Money Right
Buying a house is a legal and financial minefield. Ed Mead, executive director at Douglas & Gordon estate agents, says: “The whole process is so convoluted you need as much help as you can get.” Start with a mortgage broker or financial advisor. An independent broker is better than one provided by an estate agent. “They will probably be tied to a limited number of mortgage products and you may not find the best deal,” he warns. Ask friends or family who they recommend, or the Financial Conduct Authority (fca.org.uk) has a register of approved firms. Fees are up to 1% of the mortgage. But this is negotiable.
Once you have found a property, you need a surveyor to make sure it’s worth what you’re paying – the Royal Institution of Chartered Surveyors (rics.org/uk) has a database. A survey should cost around £400. You’ll also need to factor in stamp duty (nothing on properties under £125,000; 1% under £250,000; 3% up to £500,000), legal fees (£750-£1500), mortgage fees (£99-£250), council searches (£200- £300) as well as removal costs, buildings and contents insurance and ground rent if you buy a leasehold flat.
1. Stamp duty
2. Legal fees
3. Homebuyer report (survey)
4. Mortgage fees
5. Council searches
What about solicitors?
Your solicitor is there to talk to the vendor’s solicitor and to work out complications such as freeholders and land registry titles. Legal fees will be £750-£1,500 – you can get fixed deals which is helpful when every penny counts. The best way to find someone quick and reputable is through recommendations. The LawSociety also recommend decent practices (lawsociety.org.uk). Your solicitor will run the actual sale, check to make sure all building work on the property has been done legally, and assess problems like flood risk.
They will uncover any issues with neighbours and whether the property is insured, and arrange payment of stamp duty. Peter Rodd is doubtful you could buy without one.
“You’re about to make one of the biggest investments of your life, are you going to risk that to save £1,000?”