When people explore purchasing their first homes, they are often dissuaded by the mortgage process.
Since most consumers are unable to purchase a home outright, they must qualify for a mortgage provided by a bank or other lender.
Getting on the property ladder is not easy, particularly for buyers who cannot come up with enough money to make a deposit on their new homes.
However, first-time buyers should not give up on the dream of homeownership because it is possible.
Mortgage Trends
Housing prices have dropped in recent years but many UK residents are still having trouble becoming homeowners.
A mortgage shortage and large deposit requirements represent obstacles to first-time homebuyers. Despite this, the number of people purchasing their first home is expected to increase from September 2012 through September 2013.
Driving this trend are university graduates who are relying on financial assistance from their parents to get onto the property ladder.
Over the summer, many homebuyers began facing a more pronounced two-tier mortgage market. Those who could afford a large deposit sometimes paid half of the mortgage rate of those who could not.
This gap is growing so as homebuyers push their loan to value ratio to the maximum 95 percent, they are also paying hundreds of pounds more each month for their mortgages. Less equity coupled with potentially unaffordable mortgage payments represents a concerning trend.
Lenders charge more for a low-deposit mortgage because they incur a higher risk of loss if the price of housing falls. Since the summer, the cost gap has been expanding. Banks offer lower interest rates because they can borrow less expensively.
However, only the lowest-risk homebuyers receive these attractive interest rates. New capital rules have affected the level of reserves that mortgage lenders must allocate to low-deposit mortgages. For a loan of the same size, a lender must place one-fifth more capital in reserves for a 95 percent mortgage than for an 80 percent mortgage.
This means that for every five loans the lender makes to homebuyers with five percent deposits, it can make six loans to buyers providing 20 percent deposits.
Many current homeowners are forced to pay a standard variable rate for a mortgage because they are unable to afford the deposit for a suitable remortgage.
Large Deposits Represent Large Obstacles
The requirement for large mortgage deposits has affected the entire housing market and this includes hmo mortgage lenders and semi-commercial loans. Nearly six in ten adults responding to a July 2012 Halifax survey noted that a lack of deposit was their largest barrier to home buying.
That same month, the government published results from a national housing survey revealing that only one in every four prospective homebuyers followed through by applying for a mortgage or got anywhere near securing auction house finance. The remainder gave up because they did not believe that they had enough money saved for a deposit or thought they were too heavily in debt.
Lack of savings is even serving as a barrier for second and third-time homebuyers. Falling housing prices have eroded the value of their home equity. Some must revert to special schemes like NewBuy, which is backed by the government. Under this, buyers can purchase newly built homes with a deposit of only five percent. The government and the property builder share some of the risks, removing some burden from the lender.
More than a dozen building firms participate in NewBuy and the loans are also offered by Woolwich, NatWest, Halifax, and Nationwide Building Society. Scotland began a similar scheme in September called MI New Home. Residents may purchase a home valued up to £250,000 with a deposit of only five to ten percent. More than 15 builders including Merchant Homes, Bellway, and Lovell are already participating in this scheme.
Getting Help From Parents
The bank of mum and dad can come in handy for first-time homebuyers. Parents gift money to children that is then applied to the mortgage deposit. According to Halifax research, one-third of parents of adult children have provided funds to get their offspring onto the property ladder. The average contribution is currently £12,846. While some parents do this willingly without attaching any strings, others worry about not having the money available for their own retirement.
The Family Deposit mortgage from Market Harborough Building Society is one solution. It requires that the homebuyer make at least a five percent deposit and combines this with savings provided by relatives. The deposit and savings must equal one-quarter of the value of the property.
Savings are locked in a special account for a five-year period, during which it earns interest. The building society may tap this savings if the mortgage suffers a loss. In exchange, the borrower receives a discount of 1.5 percentage points from the variable mortgage interest rate. Lloyds TSB offers a similar loan called Lend a Hand. Families can also collaborate on offset deals that use parental savings against the mortgage obtained by a child.