First time lucky

The state of the housing market is rarely out of the news these days, and with house prices on a seemingly ever-upward spiral, the focus of many media reports tends to be on the plight of the hapless first-time buyer.

But prospects for this group are not necessarily all gloomy, so long as they are aware of some of the fundamental principles of getting on to the property ladder.

The hardest step for first-time buyers is the first – raising finance through a mortgage. This is essentially an interest-bearing loan, which is normally for a period of 25 years, and vests the right of ownership over the property to the lender until the loan has been repaid in full.

When buying a property, the first thing to determine is how much you can borrow. A bank or mortgage provider will calculate this either by multiplying your salary by a factor based on your current risk profile, or by assessing your monthly income and expenses and deciding on the monthly repayments you can afford.

If you are a first-time buyer and your finances won’t stretch to buying a property in either of these ways, there are a number of options available.

You could buy a property jointly with a friend, spouse or family member. This reduces the amount of deposit and monthly instalments you pay, as well as the initial costs, such as solicitor’s fees and so on.

You could rent out one or more of the rooms to help subsidise the monthly repayments. There is a tax incentive here, in that the first £4,250 of rental income each year is tax exempt.

You could rent out the entire property. This way, most or all the mortgage payments will be covered. The property can be an investment and the capital appreciation would enable you to sell the property later, and move up the property ladder.

The next factor to consider is the sort of mortgages that are available. Some lenders offer 100% mortgages, where no deposit is required, but these will depend on your circumstances, and may come with a higher interest rate. More typical for first-time buyers is a 90-95% mortgage, the rest being paid as a deposit.

Although the loan period is generally 25 years, a 30-year option is sometimes offered. This option, however, will result in an overall higher cost of borrowing, but the monthly repayments will be lower.

The interest rate, or APR, on the mortgage will vary depending on the length of the loan and the risk associated with the specific buyer. First-time buyers are generally offered a lower APR and, depending on the amount of the mortgage, together with the length of the loan and the risk of the buyer, it varies at the moment between 4.3% and 12.4%.

The mortgage can also have a variable interest rate or a fixed rate. A fixed-rate mortgage sets your repayments at a specified level for a given period of time. So regardless of whether the lender\’s rate goes up or down, your payments remain the same. By contrast, a variable rate mortgage will rise and fall in step with the base lending rate set by the Bank of England.

However, there are hidden costs of which you need to be aware. Since October 2005, mortgages have been regulated by the Financial Services Authority. The FSA now insists that advisers provide you with comprehensive information on all the costs that you will incur, and on the level of advice that they are qualified to offer.

They are also obliged to disclose the basis on which they will charge you – for example, whther they take a percentage of the loan or an hourly fee. It may be that they do not charge you anything, and receive their entire fee from the lender in return for introducing your business. Whichever it is, they have to inform you.

In addition to the hidden costs, there are also hidden savings that you can benefit from. If you are in a position to make extra regular repayments, these can be negotiated with the lender, and you can use them to make significant reductions to the period of the loan and the total interest. For example, by making regular voluntary payments of £100 on a £100,000 mortgage over 25 years at 7% APR, you could cut the cost of borrowing by as much as £35,000.

So you can see that even if a bald assessment of your finances might, at first glance, seem to prohibit your entry to the property market, there are still enough lending options and methods of purchase available to help you take that all-important first step up the property ladder. Decide which options best suit your circumstances, always seek expert advice, and you won’t go far wrong.

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