What help can first-time buyers get to climb the housing ladder?

It’s a tough market for starters. House prices remain high despite forecasts of double-digit declines this year, while mortgage rates are significantly higher than two years ago, putting further pressure on affordability.

At the same time, the cost of living and 10 percent inflation continue to weigh on household budgets and rents are still rising while there is a housing shortage.

The average home in the UK currently costs 9.1 times median income, according to a report by wealth manager Schroders, the most expensive in 147 years.

Homeownership hurdle: first-time homebuyers struggle as costs continue to rise

Homeownership hurdle: first-time homebuyers struggle as costs continue to rise

However, demand from starters is still high. Average home prices for typical first homes rose 0.7 percent during the year to April, compared to a 0.1 percent decline for movers.

Despite the challenge of making a down payment, rising rental costs mean homeownership can still lower many buyers’ monthly expenses.

So what options are there for first-time buyers struggling to make enough down payment?

One possible solution has been offered by Skipton Building Society, which has just taken out a mortgage for 100 per cent of a property’s value, aimed at tenants who can demonstrate that they can pay rent.

However, this will not be for everyone as the affordability criteria are strict and there is a greater risk of negative equity when borrowing such a large amount.

We look at the products and schemes currently on the market that are designed to help people up the housing ladder.

The 100% mortgage

Skipton made headlines by announcing his 100 per cent loan, which he says is designed to ‘break the bike rental trap’.

It is the first mortgage of its kind since the global financial crash of 2008 and allows buyers to borrow the full value of their home on a five-year fixed deal of 5.49 per cent up to £600,000.

However, they need a spotless credit record and the amount they can borrow is strictly controlled. Skipton says a single applicant will not be accepted if they pay more in monthly mortgage payments than they previously did in rent.

David Hollingworth of mortgage broker L&C said: ‘The rent payment will place a limit on the loan amount, but the borrower will also have to demonstrate that they can meet standard affordability requirements based on rental income and expenses.

So it’s possible that the income would support a larger mortgage, but the rent would limit the amount available on the 100 percent deal. Similarly, the rent could theoretically allow for a higher loan, but the income may not be enough to reach that maximum.”

There is also the risk of negative equity, where the outstanding mortgage is worth more than the real estate, if house prices fall.

For those who can put down a 5 percent down payment, there are other deals on the market with significantly better interest rates.

> Compare the latest mortgage rates with our search function

Deposit mortgage

In the aftermath of the 2008 financial crisis, lenders pulled their zero-deposit mortgages from the market, considering them too risky to continue lending.

Although Skipton’s is the first pure 100 percent deal, zero deposit mortgages already existed on the market based on a guarantee system.

With a guarantee product, a family member or friend with an owner-occupied home is listed on your mortgage.

Skipton has launched a no down payment mortgage, but there are other options for first-time buyers

Skipton has launched a no down payment mortgage, but there are other options for first-time buyers

Skipton has launched a no down payment mortgage, but there are other options for first-time buyers

An example is Barclays’ springboard mortgage. This home loan works by hooking a friend or family member for missed payments.

They will either have to deposit equity in their own home as collateral for the borrower’s mortgage, or put money equal to 10 percent of the borrower’s mortgage value in a linked savings account.

There are currently 15 zero-deposit products on the market, accounting for just over 0.3 percent of UK mortgages, according to financial data company Moneyfacts.

This is one of the ways family members can help children or grandchildren move up the ladder without having to immediately put money down for a mortgage – although their money and property could still be at risk if the borrower gets into trouble.

Shared Ownership Scheme

Shared ownership is a government-backed arrangement that allows someone to purchase a percentage share of a property.

The scheme is only open to buyers who cannot afford the down payment or mortgage payments on an open-market home. Shared ownership homes are usually managed by housing associations and they will check that the borrower meets these criteria.

It does not mean, as the name suggests, that you have to share your property with other people. Instead, you own part of the property and pay rent on the rest.

Buyers typically buy between 25 and 75 percent of a home with a mortgage and then pay rent on the remaining portion to the housing association. On some properties, the share purchased can be as low as 10 percent.

When buying through shared ownership, you still have to make a down payment for the share you own, just like any other real estate purchase.

Mortgage guarantee scheme

In December last year, the government extended the mortgage guarantee scheme until the end of 2023.

Through the scheme, the government lenders provide lenders with a financial guarantee designed to encourage them to offer riskier 5 percent mortgages.

It can be used for homes worth up to £600,000 and is open to first-time buyers and movers. In practice, there is little difference for the borrower between a mortgage guarantee scheme and a 5 percent deposit loan outside the scheme.

To date, it has been used by more than 24,000 households. It was first introduced in April 2021 to help savers get up the real estate ladder in the wake of the pandemic, as lenders withdrew their 95 percent mortgage deals.

Major lenders, including Halifax and HSBC, are part of the plan.

> View our starter guide to taking out a mortgage

Rent to buy

In addition to the larger, often government-backed schemes, there are also a number of local community-based initiatives to help start-ups.

For example, Cambridge Building Society offers a rent refund scheme. Launched in 2019, it gives local first-time buyers 70 percent of their rent back after three years to use as a down payment to buy a home they might not otherwise be able to save for.

Housing associations also offer rent-to-purchase options. An example is Peabody, which allows you to rent a house at a 20 percent discount and own it in joint ownership after two years.

What to do if you need a mortgage

Borrowers who need to find a mortgage because their current fixed-rate contract is about to expire, or because they have agreed on a home purchase, should explore their options as soon as possible.

This is Money’s best mortgage interest calculator powered by L&C that can show you deals that match your mortgage and property value

What if I have to borrow again?

Borrowers should compare rates and speak with a mortgage broker and be prepared to trade to secure a rate.

Anyone with a fixed-rate deal expiring in the next six to nine months should research how much it would cost them to re-mortgage now — and consider getting a new deal.

Most mortgage agreements allow fees to be added to the loan and are not charged until it is closed. By doing this, borrowers can secure a rate without paying expensive arrangement fees.

What if I buy a house?

Those with an agreed home purchase should also aim to secure rates as soon as possible so they know exactly what their monthly payments will be.

Homebuyers should be careful not to overextend themselves and should be prepared for the possibility that house prices could fall from their current highs, due to higher mortgage rates limiting people’s borrowing capacity.

Compare mortgage payments

The best way to compare mortgage rates and find the right deal for you is to talk to a good real estate agent.

You can use our best mortgage interest calculator to display deals that match your home value, mortgage size, term and fixed interest needs.

However, bear in mind that rates can change quickly, which is why the advice is that if you need a mortgage you should compare rates and then speak to an estate agent as soon as possible so they can help you find the right one mortgage for you.

> Check out the best fixed rate mortgages you can apply for

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