18 June 2007
Making your new home affordable
Latest figures from the Government show that the average house price is almost £210,000. With the UK average salary now just over £24,000, it is not surprising that many first time buyers feel a new home is out of their reach.
However, many mortgage providers are introducing new products and initiatives to help with getting a first step on the property ladder.
The single step that will make a real difference to buying a house is having savings put aside for a deposit. Not all mortgage products are available for 100% of the property's cost and having cash set aside for around 5% of the value will broaden the range of products available. However, a 5% deposit on the average house will come to more than £10,000, a figure which is unlikely to be sitting in many people's savings accounts.
Having some savings, even if it is not enough for a deposit, will prove invaluable when it comes to buying a home, as it will help to pay for estate agents' and solicitors' fees, administration charges from your mortgage lender and the cost of moving.
Many mortgage lenders, including Saffron Building Society, are approaching the issue of affordability with the interests of first time buyers in mind. Traditionally, the amount a buyer could borrow was a multiple of their, or their partner's, income. However, rising house prices mean that this formula may leave average homes out of the grasp of those on average salaries.
Instead mortgage lenders are now looking at how much a buyer can afford to spend, taking into account current debts or credit cards and making it, in effect, individually tailored to each borrower. Someone with a relatively small amount of debt and who can provide a detailed breakdown of their outgoings will be more likely to obtain an affordability mortgage.
Once a prospective buyer knows how much they can borrow, they then have the maze of mortgage products to find their way through. One important issue to keep in mind when looking at mortgage products is the Bank of England interest rate.
The rate is currently in a period where it is increasing, with more rate rises predicted before the end of 2007. However, it is yet to be seen whether this is a long-term trend or if the rates will drop back in the coming years. Borrowers effectively take a gamble when picking a mortgage product, they can go for a fixed-rate mortgage, which will protect them from any interest rate rises for a set period, usually two to three years. However, those who pick a tracker-style mortgage will see their rate rise with the Bank of England interest rate, but will also feel the benefit of any rate cut, unlike those on a fixed product.
Buyers looking to borrow more than 90% of the value of their property may find they are faced with a higher lending charge. This is in effect an insurance policy for the lender, not the borrower, and on average comes to around £1,500. Although some lenders are publicising that they do not use higher lending charges, continue to shop around as they may be recouping the cost through higher interest rates.
The first thing any prospective buyer should do before making any decisions on purchasing their first home is take advice. Sitting down with a mortgage adviser, with a full and a clear idea of your needs will prove invaluable when it comes to making a decision on how much to borrow.
