It’s no secret that in today’s climate, more and more young people are turning to the bank of mum and dad when looking to get their foot on the property ladder. House prices have increased steadily over the last few years, with the average UK property costing a whopping £226,071 as of November 2017 – an increase of 5.1% over the previous year. [1]
With interest rates looking set to increase in the near future, first-time buyers face the prospect of further difficulties when applying for a mortgage. However, all is not lost. There are several options available to new buyers which may allow you to purchase a property with only a small deposit, or even without a deposit at all:
Multiple proprietor mortgages
Multiple proprietor mortgages allow up to four people to purchase a property together. All are responsible for the loan and all own a stake in the property. This is a great option if you have a group of friends who are all looking to purchase a property and don’t mind sharing a space. Mortgages for multiple proprietors take into account the income of all applicants, meaning that you’re much more likely to be accepted for a loan.
There are different ownership options depending on your relationship to the people you’re buying with, most common are joint tenants (everyone owns an equal share of the property) or tenants in common (each own a different share of the property). The best option for you will be dependant on your personal circumstances.
Joint borrower sole proprietor mortgages
This type of mortgage allows an applicant to receive support from a friend or relative, without the other party owning a stake in the property. This usually requires a deed of trust to be written up, outlining what will happen should you fall behind with payments and who is liable if the deed of trust is broken. A will is also required for both parties, to establish what will happen to the property if either person should pass away.
The deed of trust should include a clause whereby the non-legal owner can give notice of their intention to leave the agreement, allowing them to move on should they wish. In this case, the legal owner would be required to remortgage or agree to sell the property.
Guarantor mortgages
Guarantor mortgages allow a relative or friend to guarantee the mortgage debt. This will often increase the amount a person is able to borrow. In most cases, the guarantor offers their property as collateral, meaning that they could lose their home if the legal owner of the new property were to fall behind with payments and they were unable to cover the cost themselves. However, if no repayments are missed, the guarantor incurs no fees.
Gifted deposits
This option enables a third party to gift the buyer a deposit. Essentially, a person (often a parent) pays the deposit on behalf of the buyer and signs a deed of gift, meaning that despite partly financing the purchase, they own no stake in the property. There is also the option of a deed of trust, whereby the third party may recoup the money gifted upon the sale of the property.
Purchasing from relatives
It is possible to purchase a property from a relative at lower-than-market value and use the equity as a deposit. This is also known as a concessionary purchase or gifted equity. This option is becoming increasingly popular as house prices have risen to the point where it is often possible for parents to use gifted equity to enable their child to purchase the property whilst still making a profit. This, of course, will depend upon personal circumstances.
Purchasing from landlord
As with purchasing a property from a relative, it is also possible for tenants to buy their home from the landlord, using gifted equity as the deposit, should the landlord be willing to sell the property for lower-than-market value. For example, if the property is worth £100,000, the landlord can choose to sell to the tenant for £90,000 and the £10,000 equity may be used as a deposit.
Shared ownership
Shared ownership allows you to purchase a percentage of a property (usually 25-75%), with the remainder being owned by a housing authority or private developer. This typically means that a smaller loan is required and hence a smaller deposit. You will, however, be required to pay rent on the portion of the property you do not own.
If down the line, you want to increase your share in the property, the cost of the additional share will be priced depending on the value of the property at the time. This means that you will pay more for the additional share if your property’s value has increased since you bought the first share, and less if the value has decreased. It’s also worth bearing in mind that shared ownership properties are always leasehold.
Help to buy
The government has several “help to buy” schemes in place, including a shared ownership scheme (which works as outlined above), an equity loan, and a help to buy ISA. Details on how each of these schemes work can be found on the Help to Buy website.
If you’re considering using one of these methods to purchase your first property, or would like to discuss your options, don’t hesitate to contact us. We’d be delighted to offer you a free consultation, where we can discuss your individual circumstances and provide you with a range of options tailored to your specific needs. Our contact details can be found on the Contact Us page.