You may have been told that it’s getting ever harder to get your foot on the property ladder, but if you’re determined to buy your own place, don’t let that put you off. Granted, home ownership is a huge and complicated topic, especially if you’re a first-time buyer. That said, if you’re ready to take that big adult step, you just need to know where to start and go from there.
Assuming you don’t have a trust fund handy to dip into to buy yourself a home, you need to think about getting a mortgage. This is not an easy undertaking and will require some financial planning and professional guidance from an experienced mortgage broker. In theory, the Bank of England’s recent announcement to scrap a key mortgage affordability test should make it easier to get a mortgage, but you still won’t be able to borrow more than 4.5 times your income at best.
Once you know your budget, it’s all about the deposit. Most lenders will insist on at least a 10% deposit for first-time buyers and accept the following sources of funding:
● Personal savings and investments
This common form of funding for a deposit on a first property is acceptable to every mortgage lender. Whether you put money aside monthly into an old-school building society account, have National Savings children’s bonds or premium bonds, or take advantage of the tax benefits of a Lifetime ISA specifically for the purpose of buying a home, be prepared to show evidence of an increasing balance over time.
● Gifts from family members
If you have access to the Bank of Mum & Dad, you’re luckier than you know. Many grandparents choose equity release to tap into the cash tied up in their home — without having to move out — and use the money to help the next generation onto the property ladder. Gifts from family members (parents, grandparents, siblings, aunts, uncles etc.) are usually accepted by the lender, and even close family friends (e.g. godparents) may be an acceptable source of funding. The same goes for an inheritance.
● Sale of assets
If you wish to sell some of your possessions and use the funds for a deposit on a property, this should be no problem as long as you can verify that the money comes from a legitimate source. Cars, bikes, artwork, memorabilia, jewellery — if it’s legal it should be fine to use as a deposit. The same goes for funds from the sale of other property, just so long as the proceeds of the sale aren’t under the charge of someone else.
● Bridging finance
A bridging loan is a very short-term arrangement designed to cover a gap in financing. It’s an acceptable source of funding for mortgage companies but it can be eye-wateringly expensive. If you are buying your first home and you know the funds for the deposit will be forthcoming from the sale of another asset, in just a few weeks, then short-term bridging finance could be worth considering.
● Gambling win
If you’ve won some money on the lottery, on horses or at the casino, the funds are legitimately yours fair and square to do with as you please. However, some mortgage lenders may have a problem with this if they consider that you could have a gambling habit, which puts you in a higher risk category. Some lenders have been known to scrutinise bank statements and deduct regular gambling withdrawals as monthly outgoings.
● Overseas funds
Funds from abroad can be difficult for lenders to verify and trace the origin to see whether they’re legitimate funds or whether they constitute a money laundering risk. Deposits in established overseas bank accounts may well be OK but be prepared, mortgage companies often tend to err on the side of caution and may decline the application, particularly if the money comes from a non-EU source. Every lender is different and cases are usually assessed individually, so it’s best to contact the lender to get clarity.
Unsecured borrowing such as credit cards and unsecured personal loans will generally not be accepted as a source of funding for the deposit.
Investing in property is a potentially life-changing decision and a major financial commitment, and the first step towards home ownership is to get yourself into good financial shape. Investigate all the available avenues for potential funding for a deposit, not forgetting to think outside the box where possible. In any event, regular long-term saving is a good habit to get into, whether you’re saving up for a deposit or putting it into a pension — but that’s a whole other topic.
