How to afford your first home

The property ladder can seem insurmountable

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Moving out of the parental home has traditionally been a time to start thinking about getting on the property ladder.

However, with mounting student debt levels and spiralling property prices, it is getting increasingly difficult for young couples or families to set up home once they've flown the nest.

In the South East of England particularly, the average house price of £240,000 has dissuaded many from buying property and has, instead, kept the rented sector buoyant.

Perils of first-time buying
Of course there are those who want to get on the property ladder no matter what, which is why so many high loan to value mortgages are currently being taken out. Housebuyers taking on loans of five times their annual salary or more are able to get on the property ladder but it is a dangerous game and they could face severe financial problems further down the line.

Being over-stretched on a mortgage is never a good idea as it may only take a short rise in interest rates to make affordability a serious issue. Unfortunately, in the mid to late 1980s, many house buyers learnt this lesson the hard way when their houses were repossessed after interest rates rose into double figures and they were unable to keep up their mortgage payments.

A Helping Hand
Thankfully, interest rates are currently low and mortgage products these days are far more flexible, offering payment holidays and allowing overpayments if the borrower would like to reduce the term of their loan.

But the fundamental problem for first time buyers with only a modest salary is how can they get a big enough mortgage AND find a hefty deposit (say £25,000 on a £250,000 mortgage)?

One answer is a graduate mortgage that offers a 100% mortgage (so no deposit) but does require a guarantee for the amount in excess of your borrowing limit. So, if you wanted to purchase a property for £100,000 but your borrowing limit was restricted to £70,000, the lender would consider a guarantee from a close relative. This guarantee would be limited to just the remaining £30,000.

Patience is a virtue
Graduate mortgages are a great idea in principle but it does place an enormous burden on the parents/relatives who are providing the guarantee, and could jeopardize their retirement savings.

Remember the best deals - whether fixed rate, capped, discount or tracker mortgages - are reserved for those who put down the biggest deposits. Dashing into the market without a deposit and little savings to fall back on will mean that you get the worst deals around.

Common Sense
First time buyers should not be discouraged from entering the property market but they should be realistic and avoid the usual pitfalls.

Checklist

• Do the maths: sit down and work out what you can afford. Can you still make ends meet if interest rates go up 1-2%?
• Take into account all the other costs: legal fees, furnishings, stamp duty, council tax, etc.
• Is the location you are buying desirable: do you really want to live there? If the market falters it may prove difficult to sell if your property is in Woolwich rather than in Putney, for instance
• Does your property have a second or third bedroom that you could rent out if you needed to?
• Does the property have potential for development: loft extension, etc. If you are planning a family, this may mean that you could stay where you are rather than have to finance an expensive move later on
• If you can't get financial help from family then it may pay to be patient and save for a deposit . The better mortgage packages are available to those who put down the largest deposits

Get things down on paper
Before the ink is dry on the mortgage agreement, make plans to draw up a will. It is not morbid, it is pure common sense. For a couple of hundred pounds a solicitor can draw you up a will which is highly advisable for all homeowners.

Pensions
It might seem like less of priority when you are in your 20s or early 30s, but if an employer offers you a pension where they will add to or match your contributions, snap it up. The earlier you save into a pension the better - so put aside what you can. If there is no employer pension on offer, ask about a personal pension.

ISAs
You may not have much cash to spare with children to feed and clothe and a mortgage to pay but if you do, you should at least consider using your annual ISA allowance. You can invest £7,000 a year tax-free in a combination of stocks and shares or cash.