Mortgage tips for first time buyers

Getting a foothold on the property ladder is tough for cash-strapped first-time buyers. The average cost of a first home in Britain today is £152,000 - almost seven times the average wage. High property prices have left buyers struggling to raise a deposit for first homes and many are taking on larger mortgages than at any time in history.

The biggest headache for first-time buyers is the enormous deposit required to buy a property. The average house buyer must save £23,967 and it takes five years to save this sum, up from the three years it took to build a deposit five years ago.

People are now 33 years old on average before they can afford to buy their first home. The latest study by Abbey into first-time buyers has revealed one in two prospective homeowners feel that if they don't get on the property ladder soon they never will. But while the odds are stacked against them, there is still some good news for first time buyers.

Interest rates are still around their lowest levels for more than 30 years, lenders are competing strongly for custom and not being part of a chain means there is an opportunity to negotiate a lower price from the home sellers.

Moneyextra's top tips for first time buyers

• Research the market. Learn everything there is to know about mortgages from offset, fixed rate, tracker and standard variable rate. A thorough understanding of the market will help if you have difficulty being accepted for a mortgage. Read Moneyextra's mortgage guides.
• Shop around. Some of the best rates are aimed at borrowers with a large deposit, so first-timers have to work even harder to find a suitable deal. Check out the whole market to find a product that suits you. Beware of mortgages with very low interest rates that often come with hefty redemption penalties or lock you in after an initial deal into a costly standard variable rate.
• The bank of Mum and Dad. One solution for raising money is for parents to act as a guarantor on their offspring's mortgage. Doing so allows them to extend their borrowing power. Parents promise to be responsible for the mortgage if payments are not met. For example, a first-time buyer earning £20,000 wants to buy a £150,000 home but even with affordability measures their income will only stretch as far as a £100,000 mortgage. If a parent is a guarantor, their finances will also be taken into account and their son or daughter can borrow the extra £50,000.
• Joint Mortgage. Take out a joint mortgage with a parent or other close family member. This enables a first-time buyer to use a parent's income to enhance their borrowing capacity without their parent having to consider equity release or selling investments. Both names will feature on the mortgage agreement and therefore the property deeds. If a parent is intending to sell their share of the property to you when your earning capacity allows you to take it on, they maybe liable to Capital Gains Tax, because the property will be regarded as a second home. It is key that you take independent financial advice on all aspects of this kind of mortgage.
• Rent out a room. If you can use affordability to stretch to a bigger mortgage but are concerned about meeting the repayments, consider renting out a room. In places where house prices are expensive, rents tend to follow suit and a first-time buyer could get a substantial amount towards the cost of their mortgage.
• Do your sums. Stumping up the money to pay for a deposit isn't the only costs you will need to cover to purchase a property. Other big items in the basket of costs for home ownership include: stamp duty and mortgage, surveyor and legal fees. One way to raise a bit of cash is to tot up the cost of car insurance, travel insurance, utility bills and shop around for cheaper options.
• Move away. House prices can vary significantly depending on where you live. It's a bold step but consider relocating to a cheaper part of town or even a different part of the country. Recent research by the Halifax found that while property prices in London and the South West remain expensive there are still affordable areas to be found in parts of Scotland, Yorkshire and Humberside.
• Take heart! Don't feel you've missed the boat. Experts say we are unlikely to see sky-rocketing property price increases over the next two years. With house price inflation remaining stable at around 2.5% there is less pressure to buy than if house prices were rising at 20% per year. Interest rate cuts could be on the horizon and first-time buyers are in an excellent position to negotiate good deals on asking prices, as they are not part of a chain.

17 February 2006 © Moneyextra.com

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