I was asked by a client’s daughter how she could buy her first home in London. While our capital city is notoriously expensive, the same affordability issues apply to most first time buyers across the country.
Here we’ll look at the various assistance in place to help, their benefits and – just as importantly – drawbacks, and some other tricks to get on the property ladder.
- Help to buy
This government scheme is available to UK residents over the age of 16. The properties this applies to, along with the % funding available, have gone through several changes with more to follow. Check the Help to Buy website for current eligibility.
- In addition to your 5% deposit, the government will loan you a deposit up to 20% (40% in London).
- The government loan is interest free for the first 5 years and a reasonable rate thereafter.
- The loan is a % of the purchase price. So if your property increases in value, so will the loan.
- There are limited mortgage options available, which can increase the overall cost of borrowing.
- You can’t rent out a help to buy property, so if need to move home, you will need to sell.
- Shared ownership
This scheme is designed for lower income households. You can buy anywhere from 25% to 75% of a property, with the local authority owning the remaining percentage, which you must pay rent on.
- It’s a step onto the property ladder, with plenty of choice available across the country.
- Most new developments include shared ownership properties, so you have access to properties in good condition that don’t need further investment in renovations in order to be liveable.
- You can increase your % share of ownership over time.
- Only a small % of buyers are eligible for the scheme, so selling can take time.
- When you sell you may be obliged to get a RICS valuation is carried out – at your cost – which can sometimes value your property below current market value.
- Although you will only own a % of the property you will be liable for 100% of the cost of repairs.
- You can’t rent out a shared ownership property.
- Rent to buy
This scheme offers discounted rate (usually 80%) for a set period of time, allowing you to save for a deposit and buy the house at the end of the tenancy period, usually on a shared ownership basis.
- Bank of Mum, Dad, Grandparents & Aunties
If there’s a family member planning to bequeath you something further down the line, they may consider handing you a sum early, when it can have a far greater impact. Have a gentle chat with a mutual relative to sound the situation out.
- University properties
It’s not uncommon for parents to buy an investment property for their kids to live in and share with renters during their university years. This can turn a cost into a profit. Likewise, if there’s a family member considering buying an investment property, they may consider buying in the town where you work for your mutual benefit. They may give you a reduced rent in return for looking after the property, freeing up some of your income to save for a deposit.
- Trust funds aren’t just for the rich…
As more people look to reduce the impact of inheritance tax, buying a property to put into trust, that will appreciate over time and provide a home to the beneficiaries, can be a smart move. The rules around trust funds are many and ever changing, so seek professional advice on whether this is a good move for your older family members.
- Move to a cheaper commuter town
Often, the higher the employment rate and average salary in a town or city, the higher the cost of property. So even with the schemes above, you may still be priced out. Or you may prefer to buy a property without the involvement of the government. In this case consider cheaper nearby towns.
- While few people who want to live in Windsor will be happy to live in Slough instead, Slough has experienced a significant rise in property prices in recent years, so it would have been a sound investment. Not to mention excellent transport links that cut the need for a long, multi-point commute.
- Consider the cost of commuting – there’s a balance to be found financially in the lower cost of housing versus the cost of commuting, especially as one is an expense while the other is a sound long term investment.
Buyer Beware: Market conditions & mortgage rates
The property market is considered one of the best investments in the UK, but if the market stalls you could find yourself in negative equity and unable to move. So buy a property you’re prepared to keep for 5 years to ride out a slow or declining market.
Interest rates will inevitably rise, so it’s worth getting a fixed rate mortgage so you have a set monthly cost.