Simple Pound

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Now that we have moved into our flat a few months ago, I’m starting to get itchy feet and can’t wait to go property hunting again - this time in order to buy. While I couldn’t stand having to constantly pack and unpack in college as I had to vacate my room over the holidays (i.e. three times a year…), I wouldn’t mind having to pack up the flat in order to move to my first very own flat or house!

Unfortunately, there are still a few obstacles in the way before we can set foot into our first property. I don’t need to tell you that prices in Central London are astronomic, that interest rates have seen lower levels and the credit crunch has substantially tightened lending criteria.

Luckily, the financial services industry is usually fairly quick to serve a market niche and exploit opportunities that exist in the market. Even if the market situation is as unstable as it is at the moment. What I am talking about are alternative mortgage options that go beyond the “plain vanilla” tracker or fixed mortgages.

1. Share-to-buy. Probably the easiest way to afford a decent property is not to buy on your own but instead find someone else to buy it with. Not only will multiple salaries increase the borrowing amount you’ll be granted, but properties with a larger number of bedrooms tend to be a little more spacious in general, which means that your money will go much further in terms of square footage.

However, buying a property with someone else is a major commitment and is nothing that should be decided on the fly. Instead, no matter how well you think you know the person you want to buy with, a legal agreement is a must. This should cover all eventualities regardless of how unlikely they seem at the time of purchase.

The Share-to-Buy website is a good source of information and does even provide a sample legal agreement that you can use as a starting point.

2. Professional Mortgages. If you are training to become an accountant, a dentist, doctor, pharmacist, vet or solicitor, you might be able to borrow on a higher multiple of your current salary in recognition of the fact that these professions start out on a relatively low salary compared with their future earnings potential.

However, when considering the mortgage amount you want to borrow, you should not forget that you will also need to be able to meet your monthly payments. It is no help if the bank is comfortable lending you 6x your current salary if you’re left with a mortgage payment that eats up 75% of your current salary. Hence when considering the mortgage you want, you should always think about other monthly outgoings that you have (council tax, utility bills, phone, broadband, credit card payments, food, insurance… there’s a long list!) and what amount you will have left over after all those payments are taken care of.

Places that currently advertise professional mortgages include Scottish Widows (a subsidiary of Lloyds TSB if I’m not mistaken…), Standard Life, Bristol & West and Ulster Bank (Ireland). Bear in mind that, even though your Bank / Building Society may not openly advertise this option, you might be in a position to better negotiate if you are aware of the other options you have in the market.

3. Graduate Mortgages. The clue is in the name… Having gone to University, many of us will have a few grand in student loans to pay back which could make the first property purchase even less affordable. But, similarly to the case of professional mortgages, banks are aware of your future earnings potential and will hence agree to be a little more flexible with your mortgage arrangements. This includes higher salary multiples you can borrow and the ability to borrow up to 100% (or even more) of the property’s value.

Many banks offer this option but with varying restrictions on age. Scottish Widows will allow you to take out this mortgage up to the age of 40 while HSBC is a little more stringent and insists that you must have graduated within the last 5 years.

4. Interest-only Mortgages. Most lenders will assume that your monthly payments should go towards paying down both the amount you’ve borrowed (the capital) as well as the interest accrued in borrowing it. One way of decreasing the amount you have to pay every month is to go for an interest-only option, where the total amount of your payments is used to pay only the interest you owe.

This means, no matter how long the mortgage is taken out for, the underlying amount you owe the bank never reduces. Depending on how well (or badly) the property market is performing, you might be forced to sell your house for less than you bought it for, hence owing the bank more than the proceeds from the sale. Moreover, the interest-only option means that the house you’re living in will never actually become yours - it’s effectively the bank’s property.

Most banks will offer this mortgage option, but bearing in mind the severe disadvantages it brings over the long-term, you should only use it as an interim solution.

5. Guarantor Mortgages. If the mortgage amount you’d be able to borrow on your own is just not enough to cover the value of your property (something that is very likely in the South of the country, especially London), your last resort could be your own family. Even if they don’t have any money to lend you per se, you can ask them to act as a guarantor for your mortgage.

The process for determining how much more money you could borrow if your parents (or other blood relatives) are included in the deal, is fairly complex and varies between the different lenders. Sometimes your parents will only be liable for the shortfall (i.e. the difference between the property value and the mortgage amount you’ve been granted on your own) while in other cases they would potentially have to be able to cover the full amount should you default (i.e. be unable to meet your mortgage payments).

Banks offering this type of mortgage include Newcastle Building Society and The Co-operative Bank, but again you might be able to negotiate something with your lender of choice by quoting the other options you’d have with another provider.

If you want to know more about mortgage alternatives that might be available to you, I suggest you have a look at this website as I found it very comprehensive and helpful.

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