First Time Buyer Mortgage Hacks

Jan 28, 2022

 

How to buy a house with ZERO (that’s right ZERO) or low deposit.

 

A common misconception we hear often is that you need a large deposit to buy a house.

Local papers tend to write articles on this every so often, quoting the average deposit and income needed for the average house price, which can look eye watering.

Like this one: https://www.bristolpost.co.uk/news/property/first-home-deposit-mortgage-bristol-3608850

It’s important to remember that not everyone is the same and the average situation is rarely relevant to everyone.

Whilst saving a larger deposit makes obtaining a mortgage easier and cheaper (you get lower interest rates for every extra 5% you put down), the issue is that you are chasing increasing house prices. Particularly in the last year where prices have risen by record figures (14% per annum at one point!).

Whilst there are pros and cons to buying now vs waiting and saving, you could argue that sometimes the evils is to get on the housing ladder sooner, even if the mortgages are a bit more tricky to get or expensive.

So here are 5 ways to buy a house now with little or ZERO(!) deposit

 

  • 0% Deposit – shared ownership

 

Shared ownership is a form of purchase where you own part of a property and the remaining is owned by a separate party, like a housing association. As you only need a mortgage for part of the property value, you need a far smaller mortgage.

Example:

£200k property

40% shared ownership (£80k)

60% owned by the third party (£120k)

0% deposit required.

100% mortgage of your share – £80k

Third party charges rent on the 60% share they own – this is typically 3% approximately of the share you don’t own. (£300 per month in this example)

There are some potential downsides, and certainly some areas for consideration. For example mortgage rates will be higher, and options are limited to the small number of lenders that offer them.

Rent! You have to pay rent to the owner of the other share in the property. You therefore need to think about your budget and account for a mortgage payment, and a rent payment.

The rental payment will need to be factored in for affordability and will be viewed in a similar way to having a loan payment. Therefore, you can borrow less on shared ownership than a normal mortgage. However, you need to borrow far less to get the same property so it often will balance out.

100% ownership. Most people need to increase their mortgage against the property to buy out the remaining shares from the third part (call “staircasing”). As house prices typically outstrip income…this makes achieving this in the future uncertain. If you are already borrowing at the top of your capacity, this is something to be very mindful of.

Nonetheless, it is a step on the ladder. Building equity in your share of the property with every mortgage payment, instead of only paying rent to a landlord.

 

  • 0% Deposit – Parental charge mortgage

 

If your parents have a mortgage free property, some niche lenders will take a 20% charge against their home, and then lend to you 100% of the purchase price of your first property.

Clearly your parents need to be very kind to offer to do this as they are putting their home at risk, so make sure take them out for dinner before speaking to them.

Again, there are some potential downsides, and some areas for consideration

Rates- again. These start at over 3%. Which isn’t that much more than getting a mortgage with a 5% deposit.

There are a handful of lenders that offer this type of mortgage. You may have seen lenders advertising a Springboard Mortgage, or Family Assist Mortgage, which would mostly point to one of these products.

Some parents simply won’t be comfortable in allowing a charge on their own property. As an alternative a lot of family members may be happier to remortgage their house to free up a small deposit instead. This has the benefit putting them in control the payments for the mortgage against their home, instead of their kids!

 

  • 0% Deposit – bank loan

 

This one isn’t necessarily the best idea, however it is technically possible.

Certain lenders will accept a standard bank loan as your deposit.

The loan would need to be taken out with a different provider to the mortgage lender you are applying to.

A mortgage lender will have to factor in the monthly loan payments as part of their affordability calculations, which may in turn decrease the amount you would qualify for.

Think VERY carefully before considering this and speak to a qualified adviser before doing so. If you take out the loan in advance of having a mortgage approved, you are likely to be tied in and have an “unsecured monthly commitment” that needs to be paid every month. If a lender were to decline your mortgage application during the process, you will be stuck with the loan payments, and have no home to show for it!

 

  • Family deposit booster (second charge, trust deed)

 

These options are a fairly recent inclusion, and particularly designed to help First Time Buyers with low deposits, and/or not enough income to get the loan they need. There are some exciting products now available, offered by some very modern and forward thinking lenders.

Understandably, the majority of parents are happy to help their kids get on to the property ladder, but would ideally like to have an arrangement where any deposit money they give is gradually paid back.

Many lenders aren’t happy with this arrangement, as they will consider it a “loan”, and your parents may hold a charge over the property to protect their deposit money.

More lenders will now accept a loan or a ‘charge’ against the property meaning your family can still provide you with the money as a deposit, but they will have the security and peace of mind, that legally they have a way of getting the money back.

As always, you must understand the risks with this scenario.

For example, if the lender has to repossess due to unpaid mortgage payments, it is possible that there won’t be enough equity in the property to pay off the mortgage AND pay back your family. As the mortgage lender will always be first in line to get their money back, this could then leave the person who provided the deposit with nothing!

 

  • Private deposit booster – Equity loan

 

You may have seen or heard of the Government Help To Buy Scheme. The scheme has been available for a number of years, however the criteria to get one changed in mid 2021, and it’s important to understand the rules.

The amount of the equity loan available to you will be determined by 2 important factors:

  • The area you are looking to purchase a property
  • The loan amount can not exceed 4.5x your household income

Geography is important as one of the changes that came into effect last year was that the maximum amount of the Help to Buy Loan will be limited depending on where you’re buying. As a very rough rule of thumb, if you’re buying in London and some surrounding areas, you may get as much as 40% of the property value. If you’re looking to buy any where else, the amount may be limited to 20%. The rules also differ slightly if you’re looking to buy in England, Scotland and Wales.

The income cap is hugely important and often overlooked. The calculation factors in your household income, any committed outgoings that you may have, and the anticipated monthly payment for the Help to Buy Loan. The calculator is often at odds with mortgage lenders, as it is likely you can technically borrow a higher amount with a mortgage lender than the Help to Buy Scheme will allow.

You can find useful information and guidance on the government website: https://www.gov.uk/affordable-home-ownership-schemes

As an alternative to the Government Help to Buy Scheme, there are some new lenders coming to market offering the same type of scheme, but via FCA regulated lending.

At present, the options are fairly limited, however it is highly likely that these loans will become more popular, and more available, over the coming months. Rather than relying on Government Funding, these are Private Equity Loans.

The benefit of taking this type of Equity Loan, is that you won’t be limited by the affordability caps, and they can be used on ANY property and are not only available on a new build development. This will make them far more wide reaching, and therefore far more appealing, to some first time buyers.

For more information on this type of Equity Loan, follow this link: https://www.proportunity.co/

Advantage are an authorised and registered broker with Proportunity, and we are able to give fully qualified advice if you are interested in learning more about this type of loan.

 

As always, we are here to help with any enquiry you may have, and to help you buy a property be it your first, or an addition to your portfolio. We offer friendly, experienced and knowledgeable advice with no commitment, so please do get in touch via phone, email or our chat facility on our website.

 

www.advantagefs.co.uk

https://www.facebook.com/advantagefsuk/

Tel: 0117 4420604

Email: info@advantagefs.co.uk

 

 

Steven Morris – Advising Director

CeMAP CeRER

 

Steve loves a complex mortgage. Most recently he has used his technical geekery to work his way up through Which? Mortgage Advisers, progressing to Senior Adviser and then Onboarding Manager. There, he was responsible for hiring, training and managing new advisers.

He also ran the monthly new starter inductions and wrote and maintained the telephony advice standards of the company. Outside of work Steve can be found coaching and being run ragged by his local under 10’s rugby team, Bristol Harlequins RFC.

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