How to Buy a House in London with a Small DepositBy Angelica Malin
For many first time house buyers buying a house in London is almost an impossible task. The average starter home in the capital costs around £400,000 and requires an average deposit of around £90,000. If your currently renting in London then your monthly rental cost is probably eating into your disposable income so the opportunity to save for a deposit and escape “generation rent” is near non-existent and if you are able to put some money aside, even then £400 a month will take almost 20 years to save up for the current average deposit required. Many people are now being forced to buy in the cheaper outskirts but if you already work and have friends and family in the capital then this isn’t an ideal option. However, if you do wish to buy in the capital It’s not all doom and gloom, the government are here to help! Therefore, these days any search for first time buyer homes seems to bring up the same result “shared ownership” or “Help to Buy” but what exactly are these supposedly helpful schemes? What are the pitfalls? and how can they help you to escape generation rent and get onto the property ladder.
Property Experts Direct House Buyer say that “rather than saving up for many years and missing out on the opportunity to get onto the ladder sooner, it’s important to have a good hold on the market by the age of 45 as anyone who wishes to re-mortgage and move house after this age will start seeing a restriction in the length of mortgage products offered”. This is because lenders don’t want the length of the mortgage term spilling into our retirement age, instead they will offer a shorter mortgage term which will cost you more each month.
What are the Schemes Offered
It’s important to note that it isn’t just a one size fits all scheme to buy any house thats available and there are many different offerings that are all designed to help lower the amount of deposit required and some can also help lower your monthly mortgage payments. However, there are some schemes that can end up costing you even more than your typical mortgagee and these possible pitfalls will also be discussed below. Essentially most the schemes offered fall under two category’s either Shared Ownership or Shared Equity, they are both very different but importantly they will both allow you to get onto the property ladder with a relatively small deposit, an outline of what these are is provided below:
This is the most common type of government scheme offered. With Shared Ownership you own a portion of your home (usually starting at 25%) and you rent the remaining 75%. The share that you own can also be increased over the years. The good news is you only need to put down a 5% deposit on buying your initial 25% share. So for example on a £100,000 home you’ll be taking out a mortgage to purchase a £25,000 share and a 5% deposit would only cost £1250. In real terms lets say the price of your ideal London Flat is £500,000 you would be able to buy your 25% share with a deposit of £6250. Sounds very affordable but there are other costs involved including the monthly rental of the remaining 75% of the property and other costs and some possible pitfalls along the way.
Features and pitfalls of Shared Ownership
As well as paying the mortgage on your share you will also have to pay rent to your local housing association for the remaining 75% of the property that you do not own. The good news is that the combined mortgage and rental cost to the local housing association is often cheaper than if you were solely to rent a property, especially in London where paying rent to private landlords is particularly high.
Another good feature is that the local housing association will take care of any property maintenance costs in the same way that if you were to be renting from a private landlord so it will be nice to be a homeowner without that responsibility.
Over the years you will have the opportunity to increase the amount of ownership and buy more equity share in your property it’s commonly known as staircasing. However, there are two major pitfalls to consider when doing so. Usually you are only allowed to increase your share in set increments such as buying a further 25%, this can be quite a step to undertake all in one go. You will also have to pay a whole new set of legal fees, including a new valuation to determine the current value of your home. Infact this could present a further disadvantage if your property has risen in value and you will have to pay the new current higher value for your further ownership. On the flip side, if your property actually lowers in value then you will be able to purchase further shares at an even cheaper price than you originally paid. Ultimately you can achieve 100% home ownership but doing so in different stages can cost a lot in fees.
With Shared Equity you are actually purchasing 100% of the home but with the help of a shared equity loan that goes towards paying the deposit. Typically you will take out a 75% mortgage the government will provide you with a 20% deposit loan and you will once again just need to provide a 5% deposit yourself.
The good news is that the 20% equity loan is only payable back when you eventually sell the property on and you won’t have to pay any interest on the loan for at least five years, the reason it’s called a equity loan is because technically the government will own 20% of your property and will be paid back 20% of what your property is worth in the future not what you were originally lent.
Features and Pitfalls of Shared Equity
Equity Loans of this sort from the government are only available on New build homes. Unfortunately for Londoners there aren’t too many new build properties if there are these are usually flats.
The Major Limitation to Shared equity is that you do still have to attain a 75% mortgage so on a high value London Property you will probably need a high income in order to be approved.
When you eventually sell your property you will have to pay back 20% of the current value which may be far higher than the original size of the loan, but hey-ho beggars can’t be choosers because if you are in this situation then you would have still made a profit on the remaining 80% of the homes value.
What’s the best choice
The great news is that both the above methods will allow you to get onto the property ladder with a smaller deposit than you would otherwise need. With Shared ownership 5% of a 25% share is going to be far cheaper than a 5% deposit on 100% of the property value that’s required with a Shared Equity Loan. Also, as mentioned with buying 100% of a property many people won’t be earning enough to meet the loan to value criteria when taking out a large mortgage for a London Property. Therefore, it’s more likely that just getting your foot in the door with buying a 25% share and renting the remaining portion is the most realistic first step to getting in on the London Market. Also, you may find that even though you only own a small share of your property this form ownership can work out cheaper than renting from a private landlord. If you are interested in exploring this method of ownership the first step would be to speak to a mortgage broker who can provide free advice such as Which? Mortgage advisors. There are specialist mortgage loans available for this method of purchase so they should be able to point you in the right direction and also see if you will met the eligibility criteria. If you then wish to go ahead then you should get a mortgage in principal in place before you go shopping for your new home.