With house prices soaring, mortgage rates rising and the UK gripped by a cost of living crisis, aspiring first-time buyers may be wondering whether their homeownership dream will become a reality.
Seven in ten Britons looking to buy their first home in the next two years are delaying purchases, according to research by Nationwide Building Society.
It found that nearly three in five Britons are delaying due to high house prices, while 43 per cent said rents were too high to be able to save enough for a deposit.
Moving the goalposts: soaring living costs, rising house prices and and increasing mortgage rates means that aspiring homeowners saving for a deposit will feel like they are up against it.
This is perhaps unsurprising given that average house prices have risen 12.1 per cent annually, according to Nationwide, while average rents have risen 10.8 per cent based on the latest Rightmove data.
Paul Archer, senior mortgage manager at Nationwide Building Society, said: ‘Building a deposit remains the single biggest barrier to homeownership today, with many people starting out facing a long uphill battle to save. The rising cost of living has made this even harder.
‘With high house prices and the rising cost of living, we need to tackle the first-time buyer challenge on multiple fronts.’
One option open to first-time buyers who are struggling to raise a deposit is opting for a mortgage covering 95 per cent of the property’s value.
On a £300,000 property, this could mean the difference between raising £30,000 for a 10 per cent deposit and £15,000 for a 5 per cent deposit.
David Hollingworth, associate director at mortgage broker, L&C mortgages, says: ‘The 95 per cent mortgage market has opened up substantially and many lenders will now have options for first time buyers with small deposits.
‘These deals are an important option for first time buyers who find raising a big deposit a major challenge given the escalation in house prices.
‘Deals for those with a small deposit could help accelerate the chance to buy a home by reducing the timeframe to building an adequate deposit.’
What are the best 95% mortgage deals?
Last week, First Direct launched a 95 per cent mortgage deal. It allows first-time buyers to purchase a home with a 5 per cent deposit and comes with a market leading 2.94 per cent for a five year fixed rate deal and no upfront fees.
The mortgage, which is available to both first time buyers and home movers can be used towards purchases up to £550,000 and will allow borrowers up to a maximum term of 40 years.
First Direct also allows for unlimited overpayments meaning if a borrower wants to pay off the mortgage faster they can do so without fear of incurring early repayment charges.
These charges typically range between 1 and 5 per cent of the mortgage amount.
The average home has risen in price by £29,000 in the last year to a new record of £267,620
Overpayments are extra payments made on top of the usual monthly mortgage commitments.
The majority of fixed-rate mortgage deals only allow borrowers to make overpayments amounting to 10 per cent of the total outstanding amount each year without incurring early repayment charges.
In terms of rates, the next best five year fixed mortgage covering 95 per cent of the property’s value is offered by Barclays. It charges 3.04 per cent, with no additional fees to pay.
For someone using the First Direct deal to buy a property worth £300,000 with a £15,000 deposit, they could expect to pay £1,343 a month if choosing to repay over a 25 year term.
The same person in the same situation, opting for the Barclays deal could expect to pay £1,357 a month. An extra £168 a year.
First Direct is also offering a two-year deal with a 2.79 per cent rate with no product fees attached. However, it is slightly bettered by both Barclays and Nationwide.
Barclays is charging 2.77 per cent, whilst Nationwide is also offering a 2.79 per cent, both without additional fees, but both with the added incentive of £500 cashback for first time buyers.
Nationwide is also offering a two-year fixed rate charging 2.69 per cent, with £999 in additional fees. Whether this presents better value will depend on the size of the mortgage you require.
Are you eligible for these deals?
Mortgage deals are not open to all. They often come with a list of caveats which may mean your application will fail.
This is why mortgage brokers can be worth their weight in gold as it is their job to not only find you the cheapest deal, but also to match you with a lender that won’t end up rejecting your application.
However, First Direct’s mortgages are only available online and over the telephone and do not operate through mortgage brokers. You will therefore need to approach them directly.
On the plus side, the 95 per cent deal is open to both those who are fully or self-employed and there is no minimum income requirement so someone can apply whether they’re earning £15,000 a year or a £100,000 a year.
However, restrictions do apply on certain property types.
For example, for those purchasing flats you need to at least a 10 per cent deposit to apply via First Direct.
Unlike First Direct though, Nationwide won’t consider self-employed applications and restricts its borrowers to maximum overpayments of 10 per cent of the mortgage value each year.
Its deals are also not available to those buying a flat or a new build home. You’ll need at least a 15 per cent deposit to apply via Nationwide in this case. It’s also worth noting that you can borrow up to £500,000.
The big advantage of using Nationwide is that it offers what it calls a Helping Hand to first time buyers, which allows them to borrow more than they might otherwise would be able to.
It has recently extended its ‘Helping Hand’ to make it available to those with just a 5 per cent deposit.
Helping Hand gives first-time buyers the option of borrowing up to 5.5x their income when taking one of the Society’s five or ten-year fixed rate mortgages.
Climbing the ladder faster: 95% mortgage deals could help accelerate someone’s chance of buying a home by reducing the timeframe required to build an adequate deposit.
The lower stress rate and higher loan-to-income ratio applied enables an uplift in affordability of up to 20 per cent on what someone could afford via First Direct for example.
However, there is a minimum income requirement for using the Helping Hand – it’s £37,000 for sole applicants and £55,000 for joint applicant.
With Barclays, if you want a minimum 5 per cent deposit mortgage, you can apply to borrow up to £570,000 for a house or £275,000 for a flat.
However, you won’t be able to use it towards a new-build property.
Another important role that mortgage brokers can advise on is what the maximum amount you can borrow is.
Whilst 95 per cent mortgages may help those struggling to save enough for a deposit, they won’t make any difference if you can’t actually afford the mortgage amount required.
According to Nationwide’s research of prospective first time buyers, although a deposit is the biggest hurdle, with 28 per cent claiming it is the most difficult part of home ownership to overcome, 14 per cent say it’s the ability to borrow enough.
Under current guidelines established by the Financial Policy Committee in 2014, lenders impose a loan-to-income limit on borrowers, meaning they can usually borrow 4.5 times their salary – although in some cases it can be higher than this.
First Direct’s deal will allow you to borrow up to 4.49 times your income. If buying with someone else they will combine your incomes. However, they won’t consider the income of more than two people on an application.
This means someone buying alone with a salary of £30,000 a year could expect to borrow no more than £134,700.
That may be enough in some areas of the country, but in many places, that won’t be sufficient.
A lender’s affordability assessment will also review your net income, your outgoings and monthly expenditure as well as the basic living costs of your household.
This could mean you end up being able to borrow less than the maximum income multiple depending on your other outgoings.
Is a 95% mortgage right for you?
Almost 9 in ten prospective first-time buyers have had their ability to save for a deposit impacted by rising living costs, according to Natiownide.
It found that on average, prospective first-time buyers say they will delay buying a home for nearly two years, with 19 per cent saying they are pressing pause on their homeownership aspirations for more than three years.
A 95 per cent mortgage may be one way for some to buy sooner, but it does not come without risk and added cost.
The most obvious downside of mortgages covering 95 per cent of a property’s value is that they are more expensive.
The average five-year fixed rate mortgage deal for someone buying with a 5 per cent deposit is 3.47 per cent, according to Moneyfacts.
Can you actually afford the mortgage? Homes are now less affordable than they were at the height of the financial crisis. Average earnings are being outpaced by house prices.
For someone buying with a 10 per cent deposit, the average mortgage rate is 3.22 per cent. Whilst someone able to muster up a 40 per cent deposit could expect to typically pay around 2.79 per cent.
This means if you can stretch to a bigger deposit it will open up a wider range of deals at lower rates.
Although mortgages covering 95 per cent of a property value are more expensive, for people worried about rising house prices and rising mortgage rates, it could make sense.
Hollingworth says: ’95 per cent mortgage deals are an important option for first time buyers who find raising a big deposit a major challenge given the escalation in house prices.
‘Deals for those with a small deposit could help accelerate the chance to buy a home by reducing the timeframe to building an adequate deposit.’
‘However, given that affording a big enough mortgage is in some cases a greater hurdle than raising the deposit, it may not be a solution for everyone.
‘Lenders will need to show that the mortgage is affordable and will therefore look at income and outgoings in deciding how much to lend.’
Another fear for those buying with smaller deposits, is the potential of falling into negative equity were house prices to suddenly fall. This is where the property is worth less than the mortgage secured on it.
If this happens they may find they are unable to move home or remortgage – and find themselves stuck on their lender’s standard variable rate which is typically 4 per cent or more – much higher than a fixed rate.
Chris Sykes, technical director and mortgage consultant at Private Finance says: ‘Negative equity is a major concern. We’ve just seen data on the price rises we have seen recently being the biggest in over 15 years, so it bodes the question if they’ve gone up 14 per cent, what happens if they were to go down 14 per cent?
‘Negative equity would be a real problem, granted a low risk potentially and hopefully people taking the mortgage can outpay any drops in prices, but it’s a core risk you take on.’
What other options are available to first-time buyers?
Help to Buy Equity Loan
First-time buyers can use the Help to Buy Equity Loan scheme until 2023 to purchase a new-build property up to the value of £600,000, with a maximum equity loan of £120,000 (20 per cent). In Greater London, the maximum equity loan is £240,000 (40 per cent).
The loan is interest-free for five years and helps buyers to boost their deposit and get a better mortgage rate.
The Government’s Help to Buy scheme loans first-time buyers up to 20% of their home’s value interest-free – but interest charges kick in after five years
After five years, borrowers must either pay the government back the current market value of their stake, or start paying interest. They can also repay early if they choose.
The interest rate starts at 1.75 per cent in year six, and after that it rises in line with the Retail Price Index measure of inflation plus 1 per cent each year.
Someone who bought a £200,000 home with a 20 per cent (£40,000) Help to Buy equity loan would pay £712 interest in year six, and £896 in year 10 – on top of mortgage payments.
Shared ownership homes are normally built by housing associations – organisations that focus on providing affordable homes – and buyers need to have a household income below £80,000 a year, or £90,000 a year in London, to buy one.
It can’t be used on any home, either. You must buy a designated shared ownership property from a housing association, which might be brand new or resold from an existing shared ownership home owner.
Shared ownership allows buyers to purchase a percentage share of a home, and pay rent to the developer, usually a housing association, on the rest.
They can then increase the amount they own over time, a process known as ‘staircasing’.
Buyers using the affordable housing scheme can now purchase an initial share as low as 10 per cent and can staircase in increments of 5 per cent.
There is also a gradual staircasing option for those paying in cash, which allows buyers to staircase by just 1 per cent each year, with no need to pay for a formal valuation.
Because the rents are set at local market rates, and there is a mortgage to pay on top, monthly outgoings can be as expensive as buying a home in the usual way or even higher.
So shared ownership often works best for people who have a reasonable level of income, but struggle to save a large enough deposit.
Another option is to use a company that offers a ‘deposit boost’ feature for first-time buyers.
Deposit Unlock scheme
As the popular Help to Buy scheme draws closer to its end in 2023, a new initiative called Deposit Unlock has launched with the aim of helping buyers who struggle to get big mortgages on new-builds.
Nationwide is one of the first lenders to sign up to the scheme.
Deposit Unlock allows you to buy a new-build home from participating house builders with just a 5 per cent deposit.
The scheme is available through mortgage brokers on standard new build loans of between £25,000 and £750,000.
If you would like to find out about other alternative ways to boost your deposit if you can’t access the Bank of Mum and Dad, This is Money has previously written about six options you could also consider here.
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