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How to get on the property ladder

Buying a home is a rite of passage for older generations, but younger people are waiting much longer before owning their own property.

Rents are rising, and property prices are too. Is now a good time to get on the housing ladder?

Saving for a house deposit can seem like a tall order for many. In this article we’ll set the scene and propose some ways to get your first foot on the property ladder.

Person clasping hands over small of a house

Rent rising

Rents are rising. Following a brief slowdown in rental price rises since 2016 (down to 1% in 2018) growth is accelerating again, with rents up between 1.3% and 1.5% in July 2019.

Private housing rental price change (%)

It’s a problem for people who rent. You already pay hundreds of pounds each month to a landlord and get nothing to show for it. But high and ever-increasing rents make it harder to save a deposit and get a first foot on that elusive housing ladder.

Higher property prices, but rock-bottom rates

The average cost of a house in every part of the UK continues to rise, despite some slowdown in the growth of property prices

The overage house price in the UK was £230,292 in June 2019, up 0.9% from a year earlier.

Annual property price change (%)

But those buying a house today can benefit from some of the lowest mortgage rates on record. The average interest rate on a two-year fixed mortgage was just 1.65% in June 2019, down from 2.6% five years earlier.

Average mortgage interest rates

That has a significant impact on the monthly repayments borrowers have to make. Monthly repayments on a £200,000, 25-year mortgage on the current average two-year fixed mortgage rate would be £814, compared to £907 in 2014.

Average earnings are rising… but does that help?

On average people earned £569 a week in the UK in 2018, up 3% on 2017 and 19% on 2008.

median gross weekly earnings, 2018, UK

That means someone with a £200,000, 25-year mortgage on the current two-year fixed rate deal will take 1.4 weeks at work to afford the monthly mortgage payment (£814).

So monthly payments are relatively affordable, but what about saving for a deposit? If the average property price is £230,292 that means a 10% deposit is £23,000, equivalent to 40.5 weeks earnings at the average pay, and that’s before tax.

Stamp duty and other costs

The deposit isn’t the only cost you may face when buying your first home. Stamp duty, solicitors’ fees, surveys and moving costs all add to the amount savers need to set aside.

Thankfully stamp duty is less of a concern for first time buyers, as they can buy a property stamp duty-free if they pay £500,000 or less.

How to save for a house deposit

Bank of Mum, Dad and grandparents

Some people move back in with their parents to be able to save cash faster for a deposit, while others rely on gifts or loans from family members.

In fact, the Bank of Mum and Dad is one of the UK’s biggest mortgage lenders. It may not be an option for all first-time buyers, but for those that can parental help can be invaluable in getting a leg up on to the property ladder.

Guarantor mortgages

Family members can act as a guarantor on your mortgage if you only have a small deposit or your credit record isn’t squeaky clean. It means they are legally responsible for your mortgage payments if you can’t meet them.

They might use their savings to offset your loan, or allow a charge to be placed on their own property. This means they risk losing their home if you and they fail to meet payments.

Low deposit mortgages

If you’re struggling to build a deposit, there are some mortgages on the market which allow you to borrow at 95% or even 100% loan-to-value, meaning you would only need 5% or less as a deposit.

The downsides are these mortgages are likely to be more expensive, and you risk going into negative equity if house prices fall. Negative equity means the property is worth less than the mortgage secured on it.

That said, it looks like falling property prices are fairly unlikely.

Help to Buy Equity Loan

Under the Help to Buy Equity Loan scheme the government lends you 20% of the cost of a new-build home, so you only need to find a 5% deposit in cash and you don’t have to pay any fees on the loan for five years.

Help to buy equity loan example

To reflect current property prices in the capital those buying in Greater London can borrow 40% of the cost of a new-build home. Find out more about equity loans here.

Starter Homes scheme

There’s a new government initiative in the pipeline. The Starter Homes scheme will let first-time buyers buy new-build homes at a 20% discount, up to a maximum property value of £250,000 (or £450,000 in London).

The scheme isn’t open yet and will only be available in England, you can find more information here.

Shared Ownership

Shared Ownership allows you to buy a chunk of a property, typically between 25% and 75%, while the property developer or housing association owns the rest and you pay rent on that part.

You are still liable for all maintenance even if you only part own the property. There may be service charges, you may need permission to redecorate, and it can be hard to sell on shared ownership properties if you need to move. Plus there’s no guarantee your rent won’t rise.

Sometimes you have the option to ‘staircase’ or increase your share until you own up to 100% of the property.

Find out more about shared ownership here.

Buying with friends

Buying a property with friends can bring home ownership within reach.

You could draw up a legal co-habitation agreement detailing everyone’s share in the property and what will happen if circumstances change, there’s a dispute, or one of you wants to move out. Could you afford to buy out your housemates?

Buying with friends can be complicated and requires a high level of trust, because buying a property together means you are linking your credit records. Take professional advice before you make the leap.

Lifetime ISA

There are several government schemes in place to help first time buyers. The Lifetime ISA is designed to help people save towards a first home deposit or retirement. The scheme offers a 25% annual bonus on everything you save, restricted to a £4,000 annual limit.

With the Lifetime ISA you are awarded the 25% government bonus yearly, which you can use towards your first-home deposit.

Cash or stocks & shares?

For would-be first-time buyers, the Lifetime ISA is well worth considering given the tax-efficient returns and extra government bonus. These tax advantages do depend on individual circumstances and may change in the future. But for anyone opening a Lifetime ISA, one significant decision concerns whether to put the money into a cash deposit account or invest in the likes of shares and investment funds.

Cash is less risky, but at present interest rates are low at 0.75%. Due to inflation, this can mean the value of cash diminishing over time.

Stock-market linked investments carry more risk – their value can fall as well as rise - But they also have greater growth potential for those who are planning to save over a period of around five years or more.

While past performance is no guarantee of future returns, research by Schroders suggests that money put into cash ISAs over the past two decades has grown slower than stocks-and-shares ISAs over the same timeframe. For renters who expect to have to save up their deposit over a relatively long period, so the Lifetime ISA investment option could be well worth a look.

Saving towards a house deposit is a difficult task. But making use of the schemes and saving products available could help potential first-time buyers get on the housing ladder a little faster.

Note: We take care to ensure Talking Finance content is accurate at the time of publication. Individual circumstances can differ so please don’t rely on it when making financial decision.


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