If you’ve been saving hard to buy a home, you may have felt cheered by the Prime Minister’s claim that you can now secure a mortgage with a £10K deposit.
But is this true for everyone?
The subject came up during Prime Minister’s Questions earlier this month, when leader of the Labour party Jeremy Corbyn asked whether people making the national living wage* would be able to afford one of the Government’s “discount starter homes”. David Cameron replied that when he first became PM in 2010, would-be homebuyers needed to have saved “£30,000 for a deposit on a typical home. Because of the schemes we have introduced, that is now down to £10,000”. That’s a drop of two-thirds.
*(The National Living Wage will be introduced in April, and will mean workers aged over 25 and not in their first year of an apprenticeship will be entitled to a minimum wage of £7.20 an hour)
Small deposit? What are your options?
Make no mistake - £10,000 is a lot of money. However, it’s not an impossible sum to save over a few years – particularly if you’re planning to buy a home with a partner who is also saving. But is it enough to secure a mortgage with? The Telegraph decided to put Mr Cameron’s claims under the microscope and assess whether it really is possible for first-time buyers to secure a mortgage with a smaller deposit. First it looked at the Help to Buy scheme, which was set up to help both first-time buyers and the UK construction industry by providing an interest-free loan of up to 20 per cent of the value of a new-build property.
Because this loan is interest-free for the first five years, it means the borrower could pay back less each month than they might on another type of loan, and because it helps to bump up the buyer’s deposit it should also make them more eligible to mortgage providers, opening them up to more attractive rates.
Another option is the Mortgage Guarantee scheme, under which part of your mortgage is guaranteed by the government. Unlike Help to Buy, this is not restricted to first-time buyers, or to new-build properties. The benefit is that with the government acting as guarantor, the lender feels more confident to provide the borrower with a larger loan or better rate.
Is £10k enough?
The thing is, it’s not only the size of your deposit that influences whether or not you’ll be accepted for a mortgage on the home you want. Other points for consideration are your salary, your credit history, the property itself and how much you can actually afford to borrow.
As the Telegraph pointed out, a couple who work full time and earn the current living wage would have a combined salary of £33,000. Multiplied by four (a very rough guide to how much you can expect to borrow against your earnings), this would make them eligible to borrow up to £132,000. Whether or not this is enough to buy even a starter home will depend on where in the UK they live – in London and the South East it may be tough to find even a flat for this price, whereas in northern Ireland or North East England it may be quite possible to get onto the housing ladder for this much.
Then there’s your credit history to consider. If you haven’t had the best record with borrowing - perhaps because you’ve missed payments in the past - you may find that this, teamed with your smaller deposit, means you really struggle to borrow what you need for a new home.
Borrowing too much
A smaller deposit also means you’ll be borrowing more to cover the cost of the property, which means your repayments will be correspondingly more. It is important to bear in mind that the Bank of England base rate is currently at only 0.5 per cent, but if it goes up and you don’t have a fixed mortgage the cost of your repayments could go up as well – which may make them unaffordable.
And then there’s the other costs you’ll need to consider when moving that are not included in the cost of the actual property, like stamp duty (if your property is over the stamp duty threshold price), legal fees and transporting all of your belongings.
Don’t be gloomy
If you’ve saved up £10,000 towards the cost of a home, that’s a real achievement and something to feel proud of. You may find that with this deposit you are able to get a mortgage and take your first step on the property ladder – perhaps through a scheme like Help to Buy. There are also mortgage providers like Ocean Finance that offer home loans designed for people with a less-than-perfect credit history.
However, there’s nothing wrong with taking your time to save more – and perhaps take advantage of the Help to Buy saving scheme - so you can be sure that not only do you get the property you want, but you also secure it with a mortgage you can afford.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.