Property ladder – seven step guide

Your seven step guide to climbing onto the property ladder

Property Ladder
First Time Buyers

Nearly half of those who hoped to buy a property in the last year have not been able to, according to a report looking into tough new affordability rules. High house prices and stagnant wages means hopeful homebuyers need to be more determined than ever to buy their first home.

But it is possible! Here, is our guide to help you to jump onto the housing ladder.

1. Deposit is essential

The average first-time-buyer home has climbed in value in the past 5 years, by almost 15 per cent, meanwhile income has increased by just about 4 per cent.  The gap means persevering with saving and limiting those luxuries is a must for most hopeful buyers looking to get onto the property ladder.

Although mortgages rates are lower than ever – some five-year fixed rates are only available to buyers with a deposit of at least 40 per cent.  Do not despair.  Lenders are still keen to attract first-time buyers and there are a choice of loans out there that demand a much smaller down payment.

2. Start saving Early

Currently, first-time-buyers generally need to save longer to get onto the property ladder, sometimes having to wait up to five years before making their purchase.

Savers should concentrate on cash savings as this won’t fall in value.  The easiest way is to set up a direct debit each month, shortly after pay day.  With interest rates low, the amount of capital saved is paramount.  However, it is still worth shopping around for the best interest rates on ISA’s and savings accounts.

The new government-backed Help-to-Buy ISA is due to launch soon, which will also help first-time-buyers to save.  It works the same as a standard ISA, with the added incentive that the government will pay an extra 25% of the amount you save each month, up to £250.  The maximum the government will contribute is £3,000 and the minimum amount needed to be saved to qualify for the bonus is £16,000.  The interest will build up over time like a cash ISA and the bonus from the government will be added at the end.

There is also the option of investment funds held in an ISA, although this does come with risks.  This is more suitable for buyers that are prepared to bide their time building a deposit.

The bigger the deposit, the more choice you will have in terms of mortgage lender.

3. Clean up your credit record

A good credit record is vital when it comes to jumping onto the property ladder.  Lenders will always make checks with credit reference agencies to see whether potential borrowers have kept up to date on repaying any debts they have.  It can be worth checking your own credit report before applying so you can rectify anything that may cause a problem.

Being listed on the electoral role is also important and avoiding applying for any other credit helps your credit rating too.

4. Government Incentives

The Government’s Help to Buy schemes have helped more than 88,000 people get onto the property ladder so far.  Both parts one (Equity) and two (Guarantee) have now been extended.

Equity Scheme: Borrowers must have a 5 per cent deposit to buy a new-build property. The Government will then provide a further loan of up to 20 per cent of the purchase price, interest free for five years. The borrower must obtain a mortgage for the remaining 75 per cent of the purchase price.

At the end of the five years, interest is charged – initially at 1.75 per cent a year.

If the property is sold, any unpaid part of the Government loan must be paid back. This figure is based on the percentage that was borrowed when the property was purchased.

Guarantee Scheme:  With this scheme, the borrower must put down a 5 per cent deposit and then the government agrees to protect lenders if borrowers default on their loans.  This scheme applies to new builds and existing properties.

5. Free Perks

Lenders often offer incentives, which can be very useful bonuses to first-time buyers trying to get onto the property ladder. These can be free legal fees and valuations or cash back, where lenders give a cash sum to the borrower when completion takes place. This can help towards the initial costs of buying when money might be a bit tight.

6. Shared ownership

This may provide a solution for those that are finding buying a home too much of a financial stretch.

Buyers can purchase between 25 per cent and 75 per cent of the home and then pay rent to the housing association on the rest.  Buyers may then be able to increase their share of ownership over time.

Not all lenders offer loans for shared ownership, but those that do will include rental costs when assessing a borrower’s affordability.

7. Joint mortgages and guarantors

Buying a home with friends or family comes with risks, but some lenders allow as many as four parties on a joint home mortgage. A parent can even go in with children, without living in the property.

The parent’s income can be used to increase the borrowing and is now more common than a parent acting as a guarantor, where they agree to pay any repayments if one of their offspring misses.

With a joint loan, there may be a capital gains tax liability for the parent due to it not being their main residence.  Some lenders get round this by putting the parent’s name on the mortgage but not on the property title.

A parent can also put down money to be used as a quasi-deposit, or use spare equity in their home as collateral.

Post courtesy of This is Money.