As the Bank of England raises interest rates by one quarter of a per cent (July 2014) some industry ‘experts’ claim this news will leave the first-time-buyer (FTB) market unscathed. The UK’s leading expert on lease options and co-founder of Wealth Dragons Vincent Wong considers the day-to-day reality for any FTB and also shares some top tips on how they can get themselves on the property ladder and avoid the snakes in the process.
As with any interest rate hike, this will have an impact on your loans and savings accounts. It is the nature of economics. Saying otherwise is unfounded and short sighted. The very fact that the average UK house price is £186,512 (nationwide) might put off any hungry FTB who doesn’t have a deposit in hand. So how can FTB’s take their first step?
The options available to FTB’s are extremely favourable, provided they educate themselves regarding the market and open their mind to possibilities. Prior to engaging in any financial arrangement, it is important for anyone considering a loan to understand his or her credit score. This is easily obtainable via Experian or the like. Without a strong credit score, securing a loan may be a struggle if the FTB isn’t cash rich. Whether they are a student, a bricklayer, or a trader in the financial markets, there is no viable reason why a FTB can’t pave the way towards a solid financial future.
FTB’s may come up against negativity amongst friends or family. This is quite normal for any ‘propentrepreneur’ seeking to better their quality of life. So, ignore the naysayers; believe in yourself and consider any one of the following options:
Bank Of Mum and Dad
A growing percentage of parents are buying property for their children as a way of managing their longer-term financial assets. Such purchases can also reduce Inheritance Tax at the time of one or both parents’ deaths. Slightly morbid though it may seem, it’s actually a sensible strategy. Parents can either ‘gift’ the money to their offspring (understanding that IHT may be applicable if a parental death occurs within seven years from the time of giving) or offer the child the money to cover off a deposit (ditto IHT rulings depending on how the funds are obtained). Such financial agreements can help forge bonds between parent and child as both achieve peace of mind and a home from the transaction.
Help To Buy Government Mortgage Scheme for FTB’s
The UK Government has developed a scheme to help FTB’s and those already living in a residential home with a deposit as low as 5 per cent. Two options are currently available: Mortgage Guarantee and Equity Loan. For FTB’s, this scheme is viable for properties worth up to £600,000 and for individuals who intend to live in the property (as their sole residence) and take out a repayment only mortgage. Only some lenders buy into this scheme, so FTB’s should check with a mortgage advisor. The latter will also be able to advise whether credit scoring is high enough.
Entrepreneurial FTB’s may consider clubbing together with friends to secure a deposit and co-purchase a property. There is nothing wrong with this idea in principle – far from it. However, do ensure that all parties agree to terms laid out in a written, legally binding agreement. This contract should also include a clause about exit strategy and what happens should one or more of the co-operative partners wish to sell their property share further down the line.
Shared ownership schemes are provided through local housing associations (LHA’s) whereby FTB’s or other hopeful property owners buy a share of their home, normally ranging between 25 and 75 per cent of the home’s value. The balance of the remaining share is paid as ‘rent’. A mortgage is required to support the paid-for aspect of the transaction, and this opportunity is only available to those with income households of less than £60K per annum. Shared ownership properties are always Leasehold. It is essential for any FTB to understand industry jargon such as Leasehold, Freehold, credit scoring, equity, repayment mortgage versus interest only, etc.
Lease Options (Rent to Buy)
Lease Options is a lesser-known investment strategy in the UK and is often discussed without all the facts and correct information being available to hand. Acquiring a Lease Option is a perfectly legal and viable way to take over someone else’s mortgage with the ‘option’ of buying the property for an agreed-upon price further down the line. In order for a Lease Option to go through successfully, though, it is important for the FTB to have a good credit score and engage the services of a specialist Lease Option lawyer.
In summary, if a FTB wants to dip their toes into the world of property, no matter what their situation, there is always a solution (in the main). But creativity plays a part, as does education and good advice. In this way, FTB’s will dodge snakes along their journey and get on with the best part of the deal: the house warming party in their new home.