With the average house price at an eye watering £264,000, it’s no wonder first time buyers are feeling overwhelmed. We speak to money experts who share the best ways to save for your first home
First-time buyers are feeling the strain more than ever when saving for a house – so how much do you really need in the bank to afford a home?
The latest government data published in May 2024 shows that the average UK annual pre-tax salary is £35,464 and according to figures from Zoopla, the average property price in the UK is £264,500. This means that, horrifyingly, the average UK house price is almost 7.5 times the average salary.
Most people will hope to one day own a house, but that idea can feel very out of rich in today’s economic landscape. With the cost of everything going up, many young adults will be feeling the financial strain when trying to save for a house.
Richard Dana, Founder and CEO of Tembo, a mortgage broker specialising in first-time buyer mortgages and for people facing affordability issues has said there is an “affordability issue” in the UK because wage growth hasn’t kept up with property price growth.
Saving for a house is no mean feat and although there are some lenders now offering the appealing option of a zero deposit mortgage, but the terms of these products are restrictive according to Richard. He explained that lenders will “assess” your recent rental payments as part of their affordability assessment.
“As expected there are significant restrictions around income type, property and credit history. They are also relatively expensive too with rates from around 5.55%. There is no stamp duty payable for first-time buyers on homes up to £425,000. So in theory, aside from a few thousand pounds you’d need to pay for solicitor fees, you could buy a home with very little saved.”
While most first-time buyers do have a deposit, Richard said that the majority of deposits he sees are around 17% of the value of the home – meaning it comes in at around £45,000 on a £264,000 average property. He said: “A larger deposit gives you more options and flexibility on type of property and income and will also help if there are any issues with your credit history. It also enables buyers to benefit from better interest rates which would typically start at around 4.6% in the current market.
“Having said this, there are a decent number of options for those with a 5% deposit – but rates are higher (typically around 5.2%). A 5% deposit would equate to around £13k based on the average UK house price.”
Lifetime ISA
If saving £13k for a 5% deposit feels unachievable, there are clever ways to make the most of your money. Firstly, you can get yourself a Lifetime ISA. This allows first-time buyers to save £4,000 each year, with a £1,000 government bonus added on top. In addition, savers can benefit from competitive interest rates on the whole balance.
It works out that if savers have an ISA at 4.3% and they put away £330 a month, it would take just under two and a half years to save for an average 5% deposit. If they put £200 per month into the account, it would take four years.
There are an increasing number of schemes out there that can increase first-time buyers’ affordability including Lifetime ISA, blue light mortgages that offer increased borrowing to those in the NHS, emergency services and armed forces, as well as a specialist family Boost options – where a loved one can support your purchase without needing to hand over cash savings.
The expert claimed there is a “lack of awareness of these schemes” which can mean that first-time buyers think their budget is smaller than it truly is.
Shared Ownership
Other alternatives, according to Ben Thompson, Deputy CEO, of Mortgage Advice Bureau, include the Shared Ownership Scheme, where first-time buyers can buy a proportion of the property they can afford (e.g. 25% or 50%) and pay rent on the rest of it.
This means people can access properties they would otherwise not be able to afford, due to the location or house size. Ben said: “This way, you’re also getting a foot onto the property ladder and then through a process called ‘staircasing’ which can slowly save up to own more of the house until its yours outright.”
However, there are caveats to this scheme as you still have to make monthly rental payments – and you don’t fully own the property. Although, unlike rented accommodation, a shared ownership property is viewed as your ‘rightful home’. This means you are allowed to decorate how you like, but it also means it’s your responsibility to pay for repairs and maintenance – mending or replacing a broken boiler, for example – no matter how much of the property you own.
Shared ownership properties are usually leaseholds, which means you will need to pay ground rent on your home. You would only qualify for the right to extend your lease if you have “staircased” up to 100% ownership. And finally, not all lenders offer mortgages for shared ownership, however the majority will.
Rent to Buy
Rent to Buy offers borrowers new build homes to rent for a pre-defined period with the expectation that they will buy a share of the property at the end of the rental period. Homes are available through a range of housing associations on assured shorthold tenancies with an affordable rent of 80% (or less) of market rents.
First Homes
First Homes Scheme allows first-time buyers to buy a home for 30% to 50% less than its market value. Buyers can look for new homes in their area by looking for developers or estate agents who are advertising properties under the First Homes scheme.
Right to Buy
There is also the Right to Buy which allows most council tenants to buy their council home at a discount. Buys can get a discount on the market value of their home when they qualify for Right to Buy. The maximum discount is £102,400 across England, except in London boroughs where it is £136,400.
Save to Buy
This can help renters by taking their monthly rental costs into account when saving for a deposit. It’s designed to help first-time buyers afford their own property by allowing them to exchange contracts for only a 1% deposit. Homeowners can then live in a new, energy-efficient property for up to two years for a fixed monthly cost, which goes towards their 5% deposit instead of rent. And once they reach 5% deposit, they submit a mortgage application to purchase the home.
Mortgage Guarantee
This is a government-backed initiative designed to help get people on the property ladder by giving them the chance to get a mortgage at 95% of the home value, meaning they only pay a 5% deposit. Although there are government schemes, some individual lenders also offer their own. For example, Skipton Track Record Mortgage enables renters to access the property ladder with little or no house deposit.
The Mortgage Advice Bureau borrowing calculator helps prospective homeowners understand what they could potentially borrow based on their income and deposit.
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