Top tips for first-time buyers

The number of mortgages being offered to first-time buyers continues to fall, but there are things you can do which will make it easier to get on the property ladder. We look at some of the difficulties first-time buyers face and how they can improve their chances of buying a home...

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New figures published by the Council of Mortgage Lenders this week revealed the number of loans handed out to first-timers in July was just 19,400. This is down from 19,700 on the previous month and is considerably less than the 20,100 first-time mortgages agreed in July last year.

The share of the mortgage market that first-time buyers accounted for in July also slipped to 34% from 38% in June, the lowest proportion since before the credit crunch hit in August 2007.

First-timer conundrum

At first glance, these figures don’t appear to make much sense as things are supposed to be getting easier for first-time buyers. After all, Nationwide reported house price falls of 0.9% in August and 0.5% in July, fuelling speculation of a double-dip in the housing market – great news for those yet to buy.

The number of mortgages available up to the maximum 90% of the property price has also risen to a 22-month high, according to moneysupermarket.com research – and even the average deposit being stumped up by first-timers grew to 24% of the property price in July, which is up from 21% in April and May.

So what’s the problem?

Although the situation should be improving, things are never that simple. “Even though there are more mortgages available to those with smaller deposits, many people are struggling to get them because of the very strict underwriting criteria being used by banks and building societies,” said moneysupermarket.com editor Clare Francis.

Unfortunately, it doesn’t look as though this is going to change any time soon. Only last week, financial regulators told the world’s banks they needed to double the ‘spare cash’ they hold in their coffers. This is to ensure banks never again face ‘liquidity’ problems (the amount of cash they can actually lay their hands on), as was the case in 2008 when the country’s economy fell to its knees.

Although these rules won’t be phased in until 2015, banks will have to act now by tightening the lending vice even further. And, rightly or wrong, those who have never had a mortgage before, are likely to be deemed higher risk and shoved to the back of the queue.

Fighting back

The good news is first-time buyers are not powerless in their quest to become homeowners – there are tangible measures you can now take to make the first rung of the ladder…

Save, save, save!

The bigger deposit you can get your hands on, the greater chance you’ll have of being accepted for a mortgage, so save as much as you possibly can. The more you put down, the cheaper the rate will be too.

For example, the cheapest two-year fixed rate deal available at 90% is from Yorkshire Building Society, priced at 4.95%. This compares to 2.75% from Santander in return for a 40% deposit. On a £150,000 repayment mortgage taken over 25 years, that’s a monthly saving of £180 for what is effectively the same loan.

Granted, it’s not easy to get decent returns on your savings when interest rates are still at a paltry 0.5%, but that’s why it’s especially important to shop around for the best savings accounts for your deposit money. Make sure you use up your annual tax-free cash ISA allowance of £5,100 first.

Check your credit report:

These days, your credit report is more crucial than ever when it comes to being accepted for a mortgage, as lenders will want to see a squeaky clean history of previous borrowing. In this case it’s a good idea access your report through one of the credit reference agencies before applying for a loan. This will also give you the chance to correct any errors.

“Lenders continue to favour applicants with excellent credit histories so you should monitor their credit report regularly, and make all payments on time, particularly before applying for new credit,” says James Jones, consumer education manager at Experian. You can apply for your credit report here.

Consider a guarantor:

It might be that you have a deposit but your salary does not stack up to support the mortgage you need (usually lenders require the loan does not exceed 3.5 times a single salary). But some lenders – such as Nationwide and Scottish Widows – will permit a parent or blood relative to bridge the gap by acting as a guarantor.
 
As long as you don’t default, your parents won’t be asked for a penny but bear in mind their own affordability will need to stack up and their future capacity to borrow could also be affected.

Do your homework:

A mortgage is usually the biggest financial commitment of your life, so do your research and keep abreast of the market by checking for new deals regularly.

You should also make sure you understand the different types of mortgage that are available. Worrying new research by First Direct reveals that 92% of people planning to take a mortgage in the next 12 months don’t completely understand the difference between the main types of mortgage, which means they could face a payment shock when rates rise if they thought they were protected.

Fixed rate mortgages are the only mortgages that give you the security that your payments won’t change when interest rates go up.  With a tracker mortgage, the interest rate is set at an agreed percentage above the Bank of England base rate, so payments will rise when rates increase, and a discounted mortgage means you pay a rate of interest that is set below the lender’s standard variable rate.

This week HSBC launched two new mortgages aimed at first-time buyers who have raised a 10% deposit. One is a market-leading tracker priced at 3.69% above base rate, giving a current payable rate of 4.19%, and the other is a two-year fixed rate priced at 5.09%.  Both deals come with a rock-bottom arrangement fee of £99.

To find out more about the different types of mortgage, watch our videos ‘Should I fix my mortgage?’ and ‘What’s the difference between a tracker and a discount mortgage?

Take advantage of your position:

Today’s housing market is a fragile one and buyers are in a strong position, so, brutal as it sounds, take full advantage by bartering down sellers. You can also stress the fact that you are a first-time buyer and can move quickly as there is no chain involved.

And remember that if you are in line to buy your first home before the end of this year and it costs less than £250,000, you will be exempt from stamp duty, which is usually payable at 1%.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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