More first-time buyer mortgages are appearing, but you’re unlikely to get one unless you can put down a decent deposit
Things are tough at the moment for people who want to buy their first home.
In contrast to the period leading up to the credit crunch in 2007, lenders are today much more cautious about extending finance.
Although house prices have not exactly been soaring over the last few years, they certainly haven’t suffered the kind of falls that would have enabled thousands of young people to afford their first steps on the property ladder.
Not only is mortgage finance hard to come by, but rents are on the up.
A survey published earlier this month by the Royal Institution of Chartered Surveyors (RICS) found that 42 per cent more of its members reported an overall rise in rents than those who reported a fall in February, March and April this year.
RICS said a majority of its members expected the situation to get worse in the coming months.
Home finding website Findaproperty.com found recently that house buyers who do not receive any financial assistance from their families to make their first purchase spend an average of 16 years renting, at a cost of more than £80,000.
Hope for first-time buyers?
Against this gloomy backdrop, there are a few signs of optimism for potential first-time buyers.
The past two years has seen an increase in mortgages aimed specifically at this group. These deals normally demand a lower deposit or 10 per cent or even 5 per cent, although the number of such loans available today represents a fraction of those offered in 2007.
Mortgage applicants in 2011 can also expect banks and building societies to be much more strict when it comes to looking at credit records: a single missed credit card or mobile phone bill repayment could scupper your chances of getting a home loan.
Despite these difficulties, it is still possible to obtain a mortgage if you’re a first-time buyer. But you will greatly improve your chances of being accepted and of getting a competitive interest rate if you manage to save up a substantial deposit before applying.
There are some 95 per cent loan-to-value mortgages creeping back on to the market, so you would only need a five per cent deposit but you would be foolish to assume you’ll definitely be able to get one.
Ideally you should try to save at least 10 per cent of your desired property’s value, and if house prices continue their slow descent, this might become slightly easier.
So if you want to buy a home worth £150,000, you’ll need to save up at least £15,000 – and considerably more if you want access to the cheapest mortgage rates.
Set your target
You can use Confused.com’s Savings Calculator to help you work out how long it will take you to save up the deposit you need.
Click on the “Total Savings” tab, and type in the interest rate you’re getting, plus how long you want to save for and what your target is.
The calculator will tell you how much you need to put aside every month.
Getting the best rates
You also need to make sure you’re getting the best returns on your savings.
Your first port of call should probably be your ISA allowance, as there is no income tax to pay on interest earned by ISAs.
You can save up to £5,340 in a cash ISA this tax year which runs until 5 April 2012.
Natwest and Royal Bank of Scotland have three-year fixed ISAs paying 3.8 per cent a year, but the catch is you’ll need to start the account with a £25,000 deposit and your money will be tied up for three years.
Existing Nationwide customers can apply for the building society’s instant-access ISA paying 3.1 per cent a year, while Principality Building Society is offering an instant-access ISA at 2.8 per cent.
Outside of ISAs, there are a number of good fixed-rate bonds, which could be an appropriate way to save for a house deposit as you won’t be able to dip into the cash before the fixed term has elapsed.
The Post Office has a three-year bond paying 4.05 per cent, with a minimum opening balance of £500.
If you want easier access to your money in case of financial emergencies, Nationwide’s MySave Online Plus pays 3.05 per cent, with a minimum opening deposit of £1,000.