Buying A House With Little Or No Down Payment
Everyone dreams of one day owning their own home, but many worry that that dream will never transpire into reality. With house prices continuing to rise, low-income earners are finding it harder and harder to reach that first step on the property ladder. If you find yourself struggling to save up for a down payment, here are a few options to get you on the path to home ownership.
Shared ownership allows you to buy a portion of the property, usually between 25-75%. The scheme is typically offered through housing associations but can also be offered by the housing developer. You only need a small down payment and your mortgage payments will be smaller as well. However, you will have to pay rent to the shared ownership provider for the portion of the home you do not own. Shared ownership is risky as failing to pay the mortgage or the rent can cause you to lose the property. If you don’t mind living with a roommate, shared ownership could be a great option for you as the roommate could cover the rental payment (possibly more) while you are responsible for the mortgage. The period of shared ownership is not indefinite, as you will usually have an option to buy the entire home at some point. You do need to qualify for shared ownership based on your income and applicants who work in essential services (teachers, nurses, police, etc.) are given priority.
New Build Schemes
Property developers or construction companies offer new build schemes to buyers where in the developer loans the down payment to the buyer. The buyer still has to get a conventional mortgage for the remaining balance. It sounds almost too good to be true, a brand new house for nothing down. However, this scheme does come with its risks. Upon closing, you will have to make a monthly mortgage payment as well as a monthly payment to pay back the down payment to the developer, both with interest. Those are two sizeable payments leaving your monthly salary. Therefore, it is recommended that you have no other debt upon purchasing the house, meaning no car loans, credit cards, or personal loans. You must be able to commit to your house payments or risk losing it.
Help To Buy
The Help To Buy scheme was enacted specifically to help buyers purchase new build homes. The scheme is offered to anyone over 18 with a good credit history, who intend to live in the property full time and do not own any other property. Buyers simply need to save up a 5% deposit while the government will loan the buyer an extra 20% for the down payment giving the prospective buyer a total of 25% down payment. They will then need a conventional mortgage for the other 75%. For the first five years, you will pay no interest on the 20% borrowed from the government so ideally you want to pay it off before then. At the beginning of the sixth year, you will be charged 1.75% on the loan, based on the market value at the time of purchase. Each year beyond that the fee goes up 1% plus any increase in the retail price index. Just like the new build scheme, you don’t want to be carrying any other debt besides the house. You need to make the minimum payment on the conventional mortgage and throw as much money as you can at the government loan to eliminate it within five years. You can find more information on Help to Buy here.
Low Deposit Mortgages
High street lenders are now offering 95% and 100% mortgages. You need to have a good credit score and generate an income to cover the monthly payments, which will be higher than normal. This option is beneficial as you only need to worry about covering one home loan payment (albeit high) rather than two separate payments like with help to buy and the new build scheme. This option is considered very risky though, If house prices fall, you will have negative equity in the home, owing the bank more than the house is worth. These mortgages also carry high-interest rates. Ideally, you want your house payment to be no more than 25% of you income, giving you enough wiggle room in your budget to pay extra toward the principle. You can find some of the current rates here.
Buy At Auction
If you have ever been to an auction, you know that you can get items for pennies on the pound and it’s no different for houses either. You can find some great fixer uppers at auction for a steal. You will still need a small deposit and conventional mortgage to purchase but the overall cost of the home will be significantly less than homes bought on the open market. However, you need to be prepared to do a lot of work. Houses at auction are typically in need of major repairs and complete refurbishments. So you will need deep pockets, patience, and some handy man skills to make the house habitable. Once renovations are complete, you should have a substantial amount of equity in the home.