Getting on the property ladder has always been a struggle. But a combination of soaring rents, rapidly rising house prices and stagnant wages means many millennials are worrying they’ll never be able to purchase their own home. However, Principal Mortgage and Equity Release Adviser at Pembroke Financial Services Ian Potter says there are options.
For the millennial generation, the oldest of which are now approaching 40, never owning a home could become a reality. Research from OneFamily found seven in ten worry homeownership is something they will never be able to afford. Just 50% of those nearing 40 are paying off a mortgage, a percentage the previous generation achieved a whole decade earlier. As a result, it’s predicted 20% of millennials will be tenants at the age of 65, more than treble the current 6% of over 65s that pay rent today.
Ian noted: “While, for some people, remaining a tenant suits their plans, such as offering flexibility to move for jobs, it can be far more costly. The research suggests the additional cost of renting would be around £300,000 throughout their lifetime. This is due to monthly rent typically being more than a mortgage repayment, especially in the current climate of low-interest rates, and continued payments after a mortgage term would have ended.”
If renting throughout your life suits you, it’s important to consider the financial impact in your later years. Remaining a tenant could leave a hole in your retirement finances and mean less stability. Careful planning can help you ensure you have the financial means to continue paying rent once you’ve retired.
If you’d like to buy a home but are struggling to get on the property ladder, some things could help.
1. Use a Lifetime ISA to save
Ian said: “Saving a deposit for a home can seem like an enormous challenge, a Lifetime ISA (LISA) can boost the amount you save.
“Each year, you can deposit up to £4,000 into a LISA. The government will then add a 25% bonus. So, put in the maximum annual contribution and you’ll have an extra £1,000 to use for your home. It can make homeownership that bit closer when you’re saving.”
To open a LISA, you must be aged between 18 and 40. You can choose a Cash LISA, which will provide interest on your savings, or a Stocks and Shares LISA, where your savings will be invested with the aim of delivering returns. If you plan to buy a property within the next five years, a cash account usually makes sense as investments will be affected by short-term volatility.
One important thing to note with a LISA is that if you withdraw money before the age of 60 for a reason other than purchasing your first home, you’ll lose the bonus and a portion of your own contributions.
2. Take advantage of the Help to Buy Equity Loan scheme
“The Help to Buy Equity Loan scheme can help first-time buyers in two ways,” Ian explains.
“First, when using the scheme, you only need to provide a deposit of 5%. Second, the loan will reduce the amount you need to borrow through a mortgage, which can help if you’re struggling to access enough to buy a property.”
The government will lend you up to 20% (40% in London) of the property’s value, which combined with your deposit, means you’ll only need to borrow 75% of the value through a mortgage. It can help you step onto the property ladder sooner.
There are some restrictions though. The property you buy must be a new build and have a purchase price of less than £600,000. In addition, you will need to pay the government loan back, so this needs to be factored into your long-term plans. For the first five years, the equity loan is interest-free but after this interest will be added.
3. Seek shared ownership properties
Shared ownership properties can cut the size of the deposit you need and the amount you need to borrow using a mortgage. You’ll purchase a portion of a property, paying rent on the rest. It’s a solution that can help you take that initial step on the property ladder. In most cases, you’ll be able to buy more equity until you eventually own 100% of your home, this is known as staircasing.
Shared ownership properties are usually owned by housing associations and there may be a criterion that you must meet. It’s also worth considering if there will be any restrictions and what happens when you want to sell before buying a shared ownership property.
4. Ask family if they would act as your guarantor
Ian added: “If you’re struggling to secure a mortgage, there are options available that may suit you. A guarantor mortgage allows a loved one takes on some of the risks of the mortgage. As a result, a bank may be more willing to lend or allow you to borrow more. Your guarantor will usually need to own their own home, as their savings or home will be used as security against the loan if you default on payments.”
5. Speak to the Bank of Mum and Dad
It’s no secret that the Bank of Mum and Dad has become hugely important to first-time buyers. According to a Legal and General study, £6.3 billion was gifted or lent in 2019. On average, the Bank of Mum and Dad gave first-time buyers £24,100. If your family are in a position to do so, approaching them for help could mean you’re able to buy a home.
Ian continued: “It’s important to talk about whether the money given by the Bank of Mum and Dad is a gift or loan. Would you be able to repay the money if it were needed for your parents’ retirement, for example? In other cases, a gift now may mean that you receive less from an inheritance later in life. If you approach your parents for financial help when buying a home, it’s important both of you understand what’s being agreed and it’s often vital financial and legal advice is taken.”
If you’re struggling to get on the property ladder, please get in touch.
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 a mortgage or other loans secured on it.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.