So many opinion pieces nowadays begin with a stock paragraph about how geopolitical tensions have made the markets more volatile than ever, about how the cost-of-living crisis is set to get a whole lot worse long before it stands any chance of getting better, or about how homeownership has become an almost impossible dream for many people just leaving university and starting their first job. The world is indeed in an uproar, and the fact that first-time buyers who managed to get onto the property ladder in 2021 paid an average of £281,000 does nothing to comfort the 64% of young people who fear they will never be able to afford their own home.
Those who do succeed start saving for their first property at the age of 24 on average, and the average age of completion is 32. The vast majority wish that they had started saving earlier. So what can our younger clients (or our clients’ children) do to maximise their chances of purchasing their first home?
Although the pandemic has catalysed a mini (short-lived?) rural exodus, property prices continue to vary across the country, and the southeast remains the most sought-after region. We can still expect London prices to be significantly higher than that £281,000 average. The deposit might be 5% of this sum… or it could be as much as 20%. However much one decides to put down, the savings target often seems like a long way away – despite one's very best efforts. And simply paying money into a 1.5% high-street bank savings account while skyrocketing inflation erodes the value of your cash is not going to get you very far.
First-time buyers take an average of eight years to amass their £61,100 deposit (the average deposit put down in 2021). And many find it worth their while talking to a professional about the array of schemes available that can help.
A Lifetime ISA (Individual Savings Account), for example, can boost savings by up to £1000 per year (although there is a penalty to pay if the money set aside ends up being used for anything other than the purchase of a property).
You can open a LISA and put up to £4000 into it annually to save for your deposit – provided you are between 18 and 39 years old. Whatever you put in will be supplemented by a government bonus of 25% (up to a maximum of £1000 annually). You can use what you have in your LISA after 12 months to purchase a first home worth up to £450,000.
The maximum available bonus is £32,000, but this is only possible if you open an account at 18 and save £4000 each year until you’re 50.
As of 30 November 2019, it is no longer possible to open up a Help to Buy ISA. But if you opened one before then, you can still open a LISA in addition – provided that you only put the bonus from one of the schemes towards purchasing your home.
Although it is no longer possible to open new accounts under the Help to Buy scheme, the government has created a number of others designed to assist first-time buyers. These include the “Equity Loan” scheme – the government takes an equity share of up to 20% (this rises to 40% in London) in a new-build property until you can repay the equity loan. This scheme is set to end on 31 March 2023.
There is also relief available on Stamp Duty Land Tax for first-time buyers purchasing a property of £500,000 or less that they intend to use as their only residence.
The “Mortgage Guarantee” scheme is designed to help increase the supply of 5% deposit mortgages for creditworthy households by supporting lenders to offer these products through a government-backed guarantee on new 95% mortgages. This scheme will continue until 31 December of this year.
The “First Homes” scheme supports local first-time buyers, including key workers, helping them to get onto the property ladder by offering new-build homes at a 30% discount compared with market prices.
Then there is “Shared Ownership”. This offers you the chance to buy an initial share of a home worth between 10% and 75% of its market value. You will pay rent to the housing provider on the rest and can buy more shares in your home in the future, as and when you can afford to do so (‘staircasing’). If you buy more shares, you’ll pay less rent. The amount of rent you pay will be based on the landlord’s share.
At the start of your career, affording a property on your own might be a tall order. So you might consider buying with a friend or a relative. Make absolutely sure, however, that you decide at the outset what will happen if one of you wishes to sell at a later date.
You’ll also need to make provision for dividing up the property between you, especially if one of you is paying a larger share of the deposit. If you are buying jointly, then you can either own the property as joint tenants or as tenants in common.
If you are tenants in common, the ownership of the property can be divided in any way you like, and your share can be passed on to a family member when you die. If, however, you are joint tenants, your share of the property will pass to the other person in the event of your death.
There are ways that parents can help their children get onto the property ladder without necessarily handing over cash. Some banks, for example, will take parents' savings or income into consideration when a mortgage application is submitted, even though the money remains in their name. As this gives the lender greater security, applicants will most likely be able to get a better mortgage rate.
Needless to say, independent mortgage brokers are available to provide advice about such arrangements on a free-of-charge basis. They will be able to recommend an appropriate mortgage and provide assistance with the application process.
When you apply for a mortgage, lenders will look at your credit history to determine how creditworthy you are and whether it is worth the risk of lending you money. Furthermore, if they decide that you constitute a lower risk, then they might even offer you better interest rates.
You can obtain a copy of your credit report from a credit reference agency – such as Experian or ClearScore. It might be a good idea to check that the information they have about you is actually correct: even a small mistake, such as a mistyped address, can affect your score and may even be enough to prevent a lender from lending you money.
There are a number of ways to improve on a poor credit score – although doing so might take time.
If you have any outstanding debt, always make scheduled repayments on time. If you have a credit card account but do not make use of it… close it! Alternatively, if you have never borrowed money before, then you would be well advised to apply for a credit card and then pay off the balance in full each month (before it starts incurring interest). If you have recently moved to new rented accommodation, then make absolutely sure that you are on the electoral register.
Make absolutely sure that you have as detailed an overview as possible of your finances. This means knowing exactly what you have coming in every month, and what you have going out, as well as any areas in which you might be able to cut costs and make savings.
Numerous banks – from the high-street dependables like NatWest to the virtual challengers like Revolut – offer spending analytics and facilities to help you save (card purchases can be rounded up to the nearest whole number, for example, and the difference is squirrelled away in a savings vault or invested).
But in the end, saving for a deposit is a little like achieving net zero: no one strategy on its own is sufficient. The secret to homeownership lies in making full use of all the savings options available to you, leveraging the right support scheme, getting into good saving habits… and accessing the right advice.
