London is one of the most sought after cities to live on the planet, and so it’s no surprise that owning your own slice of the pie comes with a serious price tag.
With pressure on the housing supply chain continuing to build, there is no sign of prices in the capital slowing anytime soon, with the average house price to earnings ratio standing at 18 times! In addition, house prices are expected to grow by an additional 20% over the next 5 years.
Mortgages available today are typically just 4-5 times the household income (or salary), meaning that anybody on even above average incomes will be significantly short of the 18 multiple required.
So what options do buyers have?
Guarantor Mortgage
What is a guarantor mortgage? A guarantor mortgage is a home loan where a parent or close family member takes on some of the risk of the mortgage by acting as a guarantor. This usually involves them offering their home or savings as security against the loan, and agreeing to cover the mortgage payments if the homeowner defaults (misses a payment). Some guarantor mortgages even allow you to borrow 100% of the property's value by using your parent's house in place of a deposit. On the plus side, guarantor deals might help you get a mortgage or allow you to borrow more. The main downside is that the guarantor could be liable for any shortfall if your property has to be repossessed and sold.
Who are guarantor mortgages suitable for?
A guarantor mortgage could be suitable if you're looking to buy a property with... A low income: lenders will decide how much to lend you based on your income, so having a guarantor may enable you to get a bigger loan. A small/no deposit: you could potentially borrow up to 100% of a property's value with a guarantor mortgage. A bad credit score: having a guarantor might make a lender more inclined to offer you a loan. Little or no credit history: for example, if you've never had a credit card. An independent mortgage broker can give you more in-depth advice on whether a guarantor mortgage is suitable for you.
Who can be a mortgage guarantor?
Many lenders will require the guarantor for your mortgage to be a close family member – usually a parent. Your guarantor will need to have:
Savings or property: lenders will either hold some of your guarantor's savings in a locked account or take legal charge over a portion of their property to secure the mortgage.
A good credit history: so lenders can trust that they are financially reliable.
Help to Buy Equity Loan
Help to Buy allows buyers to purchase a new build property with a maximum value of £600,000 with up to a 20% equity loan outside of London or up to a 40% equity loan inside London. The loan is available to first time buyers only, and is interest free for the first five years after which an interest rate of 1.75% is charged, increasing by the Retail Price Index (“RPI”) plus 1% annually. The loan is repaid on the sale of the property at the same percentage as what the buyer borrows.
How it works
Using a 40% equity loan as an example and a purchase price of £500,000:
The buyer has a 5% deposit of £25,000 and secures a mortgage for £275,000 being a 55% loan to value
HTB provides an equity loan for 40% of the value of the property being £200,000 and this is secured against the property as a second legal charge (the mortgage will be the first legal charge)
The buyer does not repay anything for the first five years of the loan (other than a token £1 direct debit per month) but from year six the buyer is required to pay (monthly) interest of 1.75% of
the equity loan. The interest rate then increases every year by the Consumer Price Index (“CPI”) plus 2% (a minimum of 2% will always apply even if CPI is negative)
When the buyer sells the property, they must repay the 40% equity loan at the value of the property at that time. For example, if the property has increased in value to £550,000 then the 40% amount repayable will be £220,000; if the value had decreased to £450,000 then the 40% repayable will be £180,000.