If you’ve been saving up to buy your first home, it may feel like the goalposts have been moved. First-time buyers are often told to save between 5-10% for a deposit on their home. But the impact of coronavirus means that lenders are likely to be demanding double this figure, Ian Potter, Pembroke Financial Services’s Principal Mortgage and Equity Release Adviser, explains why.
Ian comments: “Just a few months ago, mortgages requiring a 10% deposit were commonplace and there were good options for those with a 5% mortgage too. Now they have all but disappeared from the market. As economic uncertainty continues due to the Covid-19 pandemic, lenders are being more cautious and updating their lending criteria. Temporarily at least, this means mortgages with lower deposits required have been withdrawn.
“If you’ve saved up a 10% mortgage to buy your first home, it can be frustrating to now be told you need a minimum of 20%. A guarantor mortgage could offer a solution.”
What is a guarantor mortgage?
“A guarantor mortgage is a home loan where a parent or other close family member takes on some of the risks of the mortgage. It can allow you to borrow the amount needed with a lower deposit, in some cases, no deposit is required,” Ian explains.
“The guarantor would be liable for your mortgage repayments if they were missed. They’d have to cover any shortfall if the property sold for less than the amount owed on the mortgage.”
There’s more than one type of guarantor mortgage and they have slight variations. Some of the options include:
- Using savings as security. This is where your guarantor would deposit a lump sum, typically 10-20% of the property’s value, in a special savings account, which will provide interest on savings. This is held for a number of years, acting as security if you missed payments.
- Using property as security. Your family member would offer their own home as security against the mortgage you’re taking out. If you didn’t make repayments, they could stand to lose their property. They don’t have to own their home outright but will need to own a certain share, which varies between providers.
If you have a loved one that would be willing to act as a guarantor, it could mean you’re able to forge ahead with homeownership plans despite the current market conditions. As you build up equity in the property through repayments and the market recovers, you should be able to remortgage to a deal that doesn’t require a guarantor once your existing deal ends.
4 alternatives to make your deposit go further
1. Work with a mortgage broker
Ian adds: “There are still a handful of 90% mortgages available but finding them and the lending criteria has become more difficult. Engaging the services of a mortgage broker can help you find a deal that makes use of your existing deposit.
“There are hundreds of mortgage providers on the market, many of which don’t have a high street presence. As a result, you may have missed potential opportunities when searching for a mortgage yourself. A broker will also be in a position to offer advice on lending criteria, helping you to target the lender that is likely to approve your application.”
A mortgage broker will usually charge a fee for their services, but it’s an initial outgoing that can help you secure a home and a better interest rate on the mortgage too. If you’d like to discuss your mortgage needs, please get in touch.
2. Use the government’s Help to Buy scheme
The government’s Help to Buy Equity Loan scheme lets you buy a property with a minimum deposit of 5%. You then take a government loan for 20%, with a mortgage taken out to make up the remainder. It’s an option that can mean you’re still able to buy now with a smaller deposit.
However, there are some drawbacks and restrictions. It can only be used to purchase a new-build property and the total value of the property cannot exceed £600,000. You also need to factor repaying the equity loan into your budget. Interest isn’t charged for the first five years but will start to be added after this point.
3. Look at shared ownership properties
“Shared ownership properties are becoming more common. They allow you to purchase a portion of a home while paying rent on the rest. If you’re struggling to make your deposit go far enough, this can reduce the amount needed as you’ll only be taking out a smaller mortgage,” Ian suggests.
“You need to check how much the rent will be and how this affects your budget, as well as how a shared ownership property would affect long-term homeownership plans. Most shared ownership properties allow you to slowly buy more of the home until you own it outright, but this isn’t always the case.”
4. Save with a Lifetime ISA
The Lifetime ISA (LISA) is designed for first-time buyers saving for a home or people planning for retirement. Your deposits will benefit from a 25% government bonus, boosting your savings. You must be aged between 18 and 39 to open a LISA. However, you can only deposit £4,000 per tax year, so it can take some time to transfer your full property deposit.
Savings placed in a LISA can be held in cash or invested. If you’re planning to purchase a home within the next five years, a Cash LISA is often the most appropriate option as investment volatility could mean savings fall in the short term.
We’re here to help you navigate buying a home and explore all the options available. Please give us a call to arrange a meeting with one of our team.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on your mortgage.