Don’t let the withdrawal of many high loan-to-value mortgages put you off buying your first home. Here’s how you can still make homeownership a reality.
The withdrawal of many high loan-to-value mortgages amid the Covid-19 crisis is making it harder for some buyers to get onto the housing ladder.
Until recently, those struggling to save could apply for a mortgage with a deposit of just 5%. But with the pandemic creating widespread economic uncertainty, many banks have pulled 95% loan-to-value deals – meaning buyers now require a bigger deposit to purchase a home.
The prospect of rising unemployment and climbing house prices, is creating a perfect storm of bad news for those with small deposits – in particular, first-time buyers.
Existing homeowners look set to take the market share next year, a reversal of fortunes in a market that has been dominated by first-time buyers over the past decade.
However, there are still a number of ways to buy a home of your own with limited savings. This handy guide will show you how:
1. Seek out a 5% mortgage
First up, while most lenders have pulled high loan-to-value lending, there are still a few offering 5% mortgages. However, right now, these are almost exclusively ‘guarantor’ or ‘family assist’ deals.
With a guarantor mortgage, the parent secures their child’s mortgage against their own property.
Other deals require parents to put their money into a fixed-term savings account. The caveat is that your family members’ cash – or home – is at risk if you fall behind on repayments.
2. Take advantage of the stamp duty holiday
For a limited period only, there’s no stamp duty to pay on homes costing £500,000 or less – good news if you’re stretched to the limit with finding a deposit.
The stamp duty holiday saves the average buyer £4,500 which means that money can be put towards your deposit.
But you must move swiftly as the stamp duty holiday ends on 31 March 2021. Our guide shows you how to beat the stamp duty holiday deadline.
3. Lean on government schemes
Help to Buy equity loan scheme
Help to Buy enables you to buy a new-build home with a deposit of just 5%. The government will then offer a five-year interest-free loan for up to 20% of the property’s value – rising to 40% in London.
The scheme only applies to properties worth less than £600,000.
You will also still need to take a mortgage on the rest, which means 75% of the property’s value outside of the capital.
It’s worth noting that in August, the Help to Buy scheme was extended until 28 February 2021 because of the pandemic.
With the Lifetime ISA, you can get a 25% bonus worth up to £1,000 if you save a maximum of £4,000 a year towards a deposit.
You can secure up to £32,000 towards your first home, but it must cost less than £450,000. You need to be aged between 18 and 39 to apply.
Shared ownership allows you to purchase a share of a new or existing home from a council or housing association, typically at between 25% and 75% of its value.
As you pay rent on the portion you do not own, a smaller deposit is required. Over time, you have the option to increase your share in the property.
An overhaul of the scheme has recently been announced to help more people get onto the housing ladder.
The government is planning to reduce the minimum initial share people must purchase from 25% to 10%. In addition, buyers using the scheme will also be able to purchase additional shares in their property in 1% instalments, with slightly reduced fees.
Boris Johnson's new 5% deposit mortgage scheme
In October, Prime Minister Boris Johnson announced a new 5% deposit mortgage deposit scheme as part of his pledge to transform ‘generation rent’ into ‘generation buy.’
Specific details about how the scheme will work – or when it will launch – have yet to be revealed. So watch this space.
4. Check out house builder incentives
It’s worth asking house builders what incentives they are offering buyers.
From covering stamp duty bills and legal fees, to offering free fixtures and fittings, many house builders have benefits in place. Just remember that some incentives can impact how much your bank is prepared to lend you.
5. Consider buying at auction
Using the modern method, buyers bid online for an exclusive option to buy a property.
Once the online hammer falls, the buyer must pay a non-refundable reservation fee (usually around 5% of the purchase price) on the day of the auction to secure the property. This fee is paid on top of the amount bid on the property.
The buyer then typically has 56 days to complete the transaction. If for some reason the buyer doesn’t go through with the purchase, they lose that sum.
6. Pool resources with friends or family
One of the most common ways to get onto the property ladder given current affordability constraints is by pooling resources with family.
First-timers are growing increasingly reliant on the so-called ‘bank of mum and dad’ to gift money to boost the size of a deposit.
At the same time, buying with friends, partners or siblings can also make a mortgage more affordable.
You need to think about what will happen if, for example, one party wants to move on. Also be aware that if you as borrowers are ‘jointly and severally liable,’ the lender can chase any one of you for missed payments.
7. Knock down the asking price
Another way to make a property more affordable when you only have a small deposit is by knocking down the asking price.
You can often find a seller is willing to consider a reduction on the sale price of between 5% and 10%. But if you are hoping for money off, you’re going to need your best negotiating skills and choose your moment to make an offer.
Right now, due to pent up demand caused by lockdown and the stamp duty holiday, you may find sellers are determined to stand firm. But keep an eye on the market and get in there with a cheeky offer where properties aren't selling as fast.
8. A bigger deposit will give you better mortgage options
Finally, it is worth trying to cobble together a little more in the way of savings if you possibly can.
Some building societies are offering decently-priced 10% mortgages aimed at borrowers in their local area.
Other lenders are offering products, but only for those in specified professions.
But there’s a lot to be gained by bumping up your deposit to at least 15%. This could open up many more, and cheaper, mortgage options.
How to find your new home
Once you’ve done the math and worked out how best to get onto the housing ladder, make sure you check out Zoopla’s simple tools to supercharge your property search.
Register with Zoopla to get instant alerts for exactly your type of property - and save as many searches as you want.
You may also be interested in...
- The Bank of England eyes negative interest rates
- What do the new coronavirus measures mean for the property market?
- Coronavirus hits first-time buyers as mortgage availability falls