For first-time buyers or parents looking to make a good investment for their children, could recent price drops in the housing market make this the perfect time to buy?
First-time buyers, a dwindling band struggling in vain to afford a property, have become so rare since the credit crunch began that they are increasingly seen as an endangered species. This is something of a paradox; after all, by most estimates, property prices have fallen by at least 10 per cent over the past 12 months, increasing affordability.
But the effect of the credit crunch has been to make lenders extremely risk averse. Already smarting from the bad loans they have bought from the US sub-prime market, UK banks have tightened their lending criteria, and it is largely the already struggling first-time buyers who have suffered.
And even those who can raise the money face a dilemma: if prices are tipped to dip further, then why buy now? Why not wait for another ten or twenty per cent drop? ‘We’re generally advising people that they should wait and see,’ says Katy John of Priced Out, an organisation that has been campaigning for more affordable house prices. ‘We think homes are still overpriced; the correct level would be around four times average earnings, which means £120,000-£130,000, as opposed to the current average price of around £170,000.’
For those who are determined to press ahead now, the first reality check is that there is less money on the table and the cost of borrowing that money has gone up since the credit crunch began. The maximum you will be allowed to borrow is typically between three and five times your annual income.
And as David Hollingworth of broker London & Country Mortgages explains: ‘Twelve months ago, you could borrow up to 125 per cent of the purchase price, which was very attractive to people who needed to cover some of their other costs, such as moving and furnishing. Now you can’t get 100 per cent mortgages and 95 per cent mortgages are much thinner on the ground; there’s also more ‘tiering’, so the lower your deposit, and the higher your loan- to-value ratio, the more you’ll pay.’
For example, Newcastle Building Society was offering, at the time of writing, a fixed rate of 5.80 per cent over two years to somebody borrowing up to 75 per cent of the purchase price of their property; for up to 85 per cent, the rate rose to 6.50 per cent.
Arrangement fees have also shot up, with some building societies now charging more than £1,000 to arrange the loan.
If you can’t raise enough money on your own, there are a number of options that could still make the goal of buying a property achievable for many first-time buyers. Of late, the Government has increasingly been championing shared- ownership and shared-equity schemes under the HomeBuy umbrella. The details can be a little confusing, but essentially, in a shared-ownership scheme, you take a mortgage to buy a proportion of the property, say 50 per cent, and pay rent on the other 50 per cent. There is usually an option to ‘staircase’ – come back and buy extra tranches of the property at current market price – at a later date.
With shared equity, you are the sole owner in that yours is the only name on the title, but there is a second ‘equity’ loan which pays for part of the property, on which you don’t pay interest or any other repayments. When you come to sell, that second loan must be paid off, again in proportion to the new market value.
One key difference between shared ownership and shared equity is that the former is available mainly from housing associations and developers, on new-build properties that they have earmarked for the purpose, while a shared-equity purchase is not restricted in this way; you can choose any property from the open market within certain rules.
‘The government-funded schemes used to be available primarily to key workers, but the good news is that they are now being offered to a much widergroup, so long as your household income is under £60,000,’ says Helen Adams, who runs a website for first-time buyers called FirstRungNow.com.
Other options include: buying jointly with a friend; getting parents to contribute to a deposit, or act as a guarantor to your mortgage, or even to take out a joint mortgage with you; and taking out a longer- term 40- or even 50-year repayment mortgage, in order to reduce the monthly payments. Parental contributions are undoubtedly the best bet, if possible, but parents will need to look into the implications of inheritance tax, pre-owned asset tax and capital gains – contact a tax specialist for expert advice.
At the centre of the Government’ srecent initiative to get the housing market moving was a 12-month suspension of stamp duty on properties costing up to £175,000. For first-time buyers the potential saving of up to £1,750 will be worthwhile cash, but it may not be enough to persuade buyers to take the plunge now if they expect prices to fall further. ‘To take advantage you will have to complete by next September,’ says Hollingworth, ‘so I think if prices are levelling out by May or June that will persuade quite a few people to make their move or they’ll lose out.’
Words: Alexander Garrett
top picture: Kilian O'Sullivan
bottom picture: Mel Yates