Mortgage calculator: is it better to rent or buy?

A BIT of good news for struggling first-time buyers: there are ways of protecting yourself from rising interest rates and getting a leg up the property ladder without raiding the Bank of Mum and Dad. You do not have to be a key worker, live in a council home or earn a pittance to qualify; you could be earning up to £52,500 and still be eligible for help.

With the cost of the average first-time buyer’s home in London approaching £250,000, according to the Nationwide, and the cumulative effects of five interest rate rises adding £80 a month to the cost of a £100,000 mortgage, it is now accepted that the vast majority of first-time buyers need help.

David Pretty, the chairman of the New Homes Marketing Board and former chief executive of Barratt Developments, calls young buyers the “new poor”: “In theory, young buyers are better off than ever, but the serious lack of supply and high prices are now excluding most of them from the market. These people have effectively become a new class of the poor – well-educated, hard-working and well-paid, but with little or no chance of getting a home of their own.”

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He wants to see more affordable housing, mortgage tax relief and the scrapping of stamp duty for first-time buyers. Such moves would certainly help first-time buyers, but may be a long time coming – if they come at all.

Those looking to buy could consider one of the shared ownership schemes available, such as the New Build HomeBuy programme. Under the scheme, buyers can purchase part of the property, normally between 25 and 35 per cent, and take out a fixed-rate mortgage with an ordinary lender. The buyer pays a subsidised rent on the rest. Although the rent is reviewed once a year, it is pegged to inflation rather than interest rates and capped at 3 per cent of the value of the unsold equity in the first year. “It is a great way to get a foot on the ladder and will reduce exposure to interest rates,” said Graeme Moran, the director of Metropolitan Home Ownership (MHO), the agent responsible for the scheme.

Those who buy through shared ownership schemes are seldom offered mortgages from the “best buy” tables. More often than not, high-street lenders charge more, but it can still work out as a good deal overall. Figures from Hometrack, the property data company, indicate that a homeowner would pay about £236 a week for a mortgage on a two-bedroom flat in the borough of Enfield. A private tenant would pay a landlord £219 a week in a similar property. However, a shared ownership buyer who purchases a 25 per cent stake in one of the £215,000 two-bedroom flats at On the Green, MHO’s newest development in Edmonton, pays £202 a week on his mortgage and rent combined.

The scheme helped Kevin McCutcheon, who bought in Peckham, southeast London, two years ago when the cost of borrowing was low. He was working in legal publishing when he moved into a two-bedroom flat on the sixth floor of a new development, from where he can see Canary Wharf, St Paul’s Cathedral and the Houses of Parliament. “I had never heard of shared ownership until the friend I had been renting with went off and bought their own place,” he said. “I had been renting for 19 years and was sick of damp walls.”

The whole process took about five months. “I heard from MHO two months after registering on their website, and then it was another three months before I got the keys.” McCutcheon holds a 30 per cent share in his flat. As the property was worth £195,000 when he bought it, his mortgage was £58,500. At the time he took out a 5.29 per cent fixed-rate deal with the Halifax. The deal ended last March and, although McCutcheon now pays a higher interest rate of 6.69 per cent, the sums are manageable. “Next time I remortgage, I hope to buy another 20 or 30 per cent of the flat,” he says.

For a step-by-step guide to gaining a foothold on the property ladder, go to: timesonline.co.uk/firsttimebuyer

SPLITDECISIONS

How to obtain a shared-ownership home:

Register with Housing Options on www.housingoptions.co.uk or call 0845 230 8099. The website offers 2,500 homes through 50 housing associations.

Get on your local council’s housing list. Some schemes are open to all, but priority is given to key workers, locals and those on the council housing list.

Find permanent employment. Your household income must be no more than £52,500 if you are not a key worker, and no more than £60,000 if you are.

Clear your debts. You won’t qualify if your rent is in arrears or if you’ve breached your current tenancy agreement.

Start saving: you must have £4,000 or more in savings to cover solicitors’ fees, mortgage fees and stamp duty.

Be realistic. You may want a home in Chelsea, but Enfield gives greater options.

The Housing Options Affordable New Homes Show is at the New Connaught Rooms, 61-65 Great Queen Street, Covent Garden, London, on October 12, from noon to 8pm. Details: www.housingoptions.co.uk

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