10 ways to make your house purchase more affordable - but beware the risks!

Home buyers wanting to get on the housing ladder for the first time are facing the toughest conditions for 15 years in terms of affordability, according to figures from the Council of Mortgage Lenders (CML). While the rate of rise in house prices continues to outstrip earnings, lenders' mortgage interest rates also continue their upward path.

Halifax - Britain's biggest mortgage lender - shows house prices have risen 10.7% in the year to June, despite four base interest rate rises since August. While the pressure on household finances resulting from interest rate rises may do something to curb future demand, Halifax still expects house prices to rise by around 6% in 2007, meaning that buying a house will remain out of reach of many people.

However, if you are determined to own your own home, there are a number of strategies you can employ to make your purchase more affordable. None is without risk, so you should consider the disadvantages of them carefully if you cannot afford a plain vanilla capital repayment loan - the type where the loan is guaranteed to be paid off at the end of the borrowing period - or you cannot manage without help from a third party.

Why not talk to one of our independent mortgage advisers?

Interest-only loan

With an interest-only loan you just pay the interest on the money you have borrowed, making the monthly payments very much more affordable, because you don't have to find money to start to repay the capital debt. According to the CML, the number of interest-only loans taken out in 2006 was up by 33%, to 222,400. However, this is a dangerous strategy, and one in five lenders will not offer a loan on this basis, because at the end of the loan term you will still owe the full amount that you borrowed, and although you have shelled out considerable sums in interest, you will still not actually own your home.

An interest-only mortgage can be a good idea if:

• you are on a low income, but expect to be on a higher income in future when you can start to make capital repayments,
• you are buying in the short term perhaps if you plan to move abroad;
• or you can "downsize" and repay the loan with the proceeds of the sale of the property.

However, if property values fall, this strategy could backfire and you will be left with negative equity, where you owe more to the lender than the property is worth.

Use our calculator: How much could I How much could I afford to borrow?to borrow?

Lengthen the mortgage term

As long as the term, the lifetime of your mortgage, does not extend past the date of your expected retirement, go for a longer term than the standard 25 years. Alliance & Leicester, Nationwide and Halifax can all lend over 40 years - which probably means your working past the age of 65.

A £200,000 repayment loan at a rate of 5.7% would mean making monthly repayments of £1,020.78 over 25 years, but over 35 years monthly repayments would be just £901.07, and over 40 years a much more comfortable £868.64. Remember, however, that the longer the term the more interest you will pay in total.

Among the best deals on longer-term loans, Kent Reliance offers a rate of 5.98% on a 25-year fixed-rate mortgage, while Manchester Building Society offers 5.99% for a 30-year term.

Use our calculator: What will my repayments be?

24 July 2007 © Moneyextra.com

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