First-time buyers in the UK have been faced with increasingly challenging conditions in 2020, with the average amount required for a deposit skyrocketing from 5% to 15% of the property's value. This means many prospective house buyers - many of whom have been saving hard to fund the purchase of their first home - are now having to postpone.
This was a topic discussed in our recent event "Property in a Pandemic: Is now the time to move?
In this article, we explore exactly how much a first-time buyer needs to have as a deposit, which mortgage deals are currently available to them and how to keep the dream of property ownership alive in these difficult times.
How much deposit do first-time buyers need?
The main issue that has affected first-time buyers this year is the fact lenders have tightened up their lending criteria and pulled a lot of their higher loan-to-value (LTV) products earlier in the summer. This meant that the vast majority of 95% LTV mortgages, which required a deposit of 5%, were no longer available. In fact, it became increasingly difficult to find deals above 85% LTV, which meant a hike up to 15% deposit.
The good news is there are now some higher LTV products returning to the market, particularly around the 90% LTV mark, which means buyers would need a 10% deposit. However, first-time buyers need to be savvy as these new deals are often relatively expensive, which could mean monthly repayments being significantly higher.
What support is the government giving first-time buyers?
The government previously introduced relief for first-time buyers on the first £300,000 of Stamp Duty for properties up to the value of £500,000. However, that has now been superseded by the Stamp Duty holiday for all buyers for the first £500,000 of any property, which is available until the end of March 2021. While this is still good news for first-time buyers, it means they don't stand to enjoy quite as much of a boost as other buyers.
All is not lost though, as the Prime Minister recently announced his commitment to "turn generation rent into generation buy". Although the details of this plan are unclear, the government is mindful of two million potential first-time buyers who could afford the repayments on a mortgage and yet are struggling to find a suitable product at a reasonable LTV. The proposed solution is to encourage lenders to offer long-term fixed rate 95% LTV mortgages. Frustratingly though, there is no suggested timeframe for when this could be introduced.
How to save for a deposit
Many first-time buyers will be keen to increase their savings pot at the moment, either while waiting for the mortgage market to open up further and reintroduce higher LTV products, or while they wait to see what happens to property prices or the proposed new government initiative. Indeed, when it comes to deposits, bigger is always better, so it pays to accumulate as much extra cash as possible.
Ways to make your deposit savings go further include:
- Help to Buy ISA: If you were lucky enough to open a Help to Buy ISA before the November deadline, it really pays to put in as much as possible to hit the maximum £12,000 limit, which secures a £3000 contribution from the government.
- Lifetime ISA: For those who missed out on Help to Buy, it may be worth opening a Lifetime ISA, which allows people saving for their first home the opportunity to save up to £4,000, which will be boosted by a 25% contribution by the government, up to a maximum of £1,000 per year. The £4,000 allowance is deducted from your £20,000 annual ISA contribution limit, meaning you could still benefit from the tax benefits and slightly higher savings rates on a further £16,000 of savings per year in another ISA product. you may want to check out our article: "Compare the best and cheapest Lifetime ISA"
- Cut your costs: Consider ways to reduce your monthly outgoings by considering changing providers for utilities, mobile phones, broadband and TV packages. These savings can then be put towards your deposit. Check out our article "25 money saving tips that could save you thousands"
- Shared ownership: For some first-time buyers, shared ownership offers a way on to the housing ladder without the need to have a really high deposit. As you only buy between 25-75% of the property, you only require a smaller overall deposit for the property. Keep in mind that your monthly outgoings are likely to be the same as if you bought the property outright though, as you will still be required to pay rent on the proportion of the property you don't own.
Can I get help for a deposit from family or friends?
The short answer is, yes, family or friends can contribute to your deposit if they are willing and able to. As with all deposits, the contributor will have to prove how they accumulated the money (with proof of savings and/or income) as an anti-money laundering measure. Other factors to consider are:
- The gifted deposit must be a gift rather than a loan. There must not be any requirement for any part of the gifted deposit to be repaid.
- The person gifting the deposit must agree they have no rights over the property, either in terms of having a right over any equity or having a right to live in the property after purchase
- Not all lenders accept gifted deposits, so it is worth checking before starting the application
- If the person who gifted the deposit dies within seven years of making the contribution, inheritance tax may be payable
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