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There has been a marked increase in the number of mortgages available to buyers with a small deposit.
First-time buyers wave goodbye to a popular government-backed mortgage scheme today. Help to Buy was introduced as one of a series of measures to kick-start the housing market, offering banks and building societies a government guarantee on mortgages with a loan-to-value (LTV) ratio of up to 95 per cent on properties valued at up to £600,000. So where does the government’s scrapping of the scheme leave first-time buyers hoping to get on the property ladder in 2017?
Help to Buy equity
The Help to Buy mortgage guarantee scheme may be ending, but the Help to Buy equity loan scheme continues until 2021. It allows applicants buying a new-build home to borrow a percentage of the price interest-free for the first five years. If you can save a 5 per cent deposit, the government will lend up to 20 per cent on a property outside London (40 per cent in the capital). You have to buy from a participating developer, so do your research.
Adrian Anderson, the director of Anderson Harris, a mortgage broker, says: “With the equity loan, the buyer would have access to 75 per cent LTV products from participating lenders, so the rates are cheaper.”
The Help to Buy Shared Ownership scheme is also still available for first-time buyers. This allows individuals or couples earning less than £80,000 (or less than £90,000 in London) to buy a share of a home at 25 to 75 per cent of its value. They then pay rent to a housing association, which owns the remaining share of the property, but have the option of increasing their ownership later.
The 95 per cent loan
The mortgage guarantee scheme helped to boost confidence among lenders and there has been a marked increase in the number of mortgages available to buyers with a small deposit. There are now 202 loans at 95 per cent LTV, compared with 151 a year ago, according to Moneyfacts.co.uk.
Charlotte Nelson, of Moneyfacts, says: “Since the introduction of the scheme, the number of products has increased and the average two-year fixed rate with a five per cent deposit has fallen below 4 per cent for the first time.”
Andrew Montlake, a director at Coreco, the mortgage broker, warns that there may be a dip in the number of loans available while lenders rejig their offerings over the coming weeks. However, he adds: “Borrowers should remember that if they cannot find what they require on the high street, there are building societies and challenger banks who may be able to assist.”
The best deals include a two-year fixed rate from Nottingham Building Society, through brokers, at 3.29 per cent with a £999 fee, including valuation. Hinckley & Rugby Building Society offers a five-year fix at 3.8 per cent with a £999 fee.
Bank of Mum and Dad
Many first-time buyers struggling to borrow what they need or raise a big enough deposit can enlist a member of their family to help. Mark Harris, the chief executive of SPF Private Clients, a mortgage broker, says: “The environment for first-time buyers is still rosy. Aside from high loan-to-value loans, there are plenty of products geared to allow parental assistance.”
Barclays’ Family Springboard mortgage allows family members, and others, to provide a 10 per cent security deposit, held in a Helpful Start account. The Family Building Society offers the Family Mortgage, which operates in a similar fashion.
Barclays also has a Family Affordability Plan, which allows parents to help their children through a joint mortgage. The parents’ income can be used alongside the child’s income to calculate how much they can afford to borrow. If eligible, they can use the total income on the mortgage application. If the mortgage is approved, all parties will be liable for the monthly repayments. The parents’ names appear on the mortgage papers, but they are not co-owners of the property.
There are also asset-backed options such as Aldermore’s Family Guarantee, under which a mortgage of up to 100 per cent is secured against the guarantor’s residential property.
Boost your deposit
Having a larger deposit can help to cut your monthly repayments. David Hollingworth, the associate director at London & Country Mortgages, says: “Stretching to a 10 per cent deposit can make a substantial difference to the rates on offer. Lenders are offering two-year fixed rates below 2 per cent for those with at least 10 per cent to put down — that’s more than 1.25 percentage points less than the lowest rate for those with a 5 per cent deposit. Hinckley & Rugby Building Society offers a two-year fixed rate at 1.95 per cent with a £999 fee”.
Mr Anderson says: “The other advantage of a bigger deposit is that you are regarded as lower risk, so the underwriting won’t be quite as stringent.”
Bagging a loan
While the growing availability of home loans to those with small deposits is a positive step, the other significants pressure for first-time buyers is affordability. Many may find that they are unable to borrow what they need based on their salary. Aaron Strutt, of Trinity Financial, suggests shopping around. He says: “Lenders change their maximum income multiples — the calculation used to determine how much you can borrow — much more regularly than they used to, so if you can’t get a big enough mortgage it is worth talking to other lenders.”
A broker might be able to help to match you with the right lender for your circumstances. Search for one at unbiased.co.uk. Mr Anderson adds: “Higher loan-to-value mortgages produce a higher risk to the bank, so you will need a very good credit score, as well as meeting the bank’s affordability criteria. It is worth checking your credit file with one of the credit reference agencies before making an application, so you can ask for any mistakes to be corrected.”
To see our best-buy mortgage tables go to tinyurl.com/znbgmol