Keep it in the family
Rebecca O’Connor got on the property ladder by buying with her sister in another city
SIX months ago I responded to the words “property ladder” with a mixture of self-pity and nausea. I am single, 25 and live in London. Apart from the thought of losing my job, nothing could induce despair like the prospect of renting into eternity. I raged about the injustice of market forces, student loans, having parents who cannot afford to help, the lack of proper assistance for anyone who is not a teacher in Surrey and, critically, the lack of a rich boyfriend.
A tenth of graduates are so down on the idea of buying that they have given up altogether, according to a report from Scottish Widows Bank. The average starting salary in London is £22,737, but the average first-time buyer property in the capital costs £150,252, requiring a standard deposit of £30,185. With house prices rising faster than starting salaries, that elusive first rung is only moving farther out of reach.
The Government and mortgage lenders have recognised the problem, but the solutions they have offered so far have been piecemeal. A new government initiative launched this month, the Open Market HomeBuy scheme, run in conjunction with lenders, will benefit only a few buyers who meet the criteria. Lenders’ own deals often force borrowers to accept a compromise, either on the rate or on the profit from the sale. Many aspiring homeowners are falling between the cracks.
After a forlorn investigation into my own options, I resigned myself, like thousands of other graduates in the capital, to lining the pockets of landlords for the rest of my days. Yet somehow I have managed to join the smug ranks of home ownership and it was not as difficult as I thought. Instead of trying to buy by myself in London, where I live and work, I bought with my 21-year-old sister, Cathy, in Nottingham. She too was priced off the ladder. Even standard £90,000 first-time-buyer properties in Nottingham are out of reach for a single person on a salary of £15,000. But Cathy and I are now the proud owners of a newly renovated two-bedroom maisonette, 15 minutes’ drive from the city centre, for the relatively modest sum of £106,000. A similar property in London would have set me back £300,000.
Cathy, who works in marketing, now lives there with her boyfriend Toby, a first-year student, and Toby’s friend Theo, also a student. She and I split the mortgage repayments of £664 each a month. Although I am still living in London and paying rent of £600 a month, I am not out of pocket because Theo’s rent covers my half of the mortgage. According to the terms of the Government’s Rent a Room scheme, we are allowed to make £4,250 a year in rental income without paying tax.
This arrangement, which can best be described as a kind of hybrid joint first-time buyer, buy-to-let solution, is not a traditional way on to the ladder because, unless a mortgage is taken out on a buy-to-let basis, lenders will not consider rental income when determining how much you can afford to borrow. Our loan was granted on the basis that I would be able to afford the repayments on top of my rent in London. Most lenders will also not offer loans for 100 per cent of the property’s value to two people if one of them lives elsewhere. According to them, the risk is that the borrower not in residence will be more likely to default on repayments. But Cathy is my sister; without being disowned by my entire family, I could not simply abandon her — I know my filial duties. Cathy calls me The Royal Bank of Becky; there as a source of funding and occasionally called upon to perform cost calculations or offer a second opinion on furniture choices.
Nick Gardner, of the broker Chase De Vere Mortgage Management, says: “Lenders are worried about affordability. This arrangement looks risky because of the rent on top of the mortgage. It is also awkward from a regulatory point of view. It is not a buy-to-let because someone is living there, but it is not a principal residence either because one borrower is not living there.”
In our case, only three lenders would consider our application: Portman Building Society, Royal Bank of Scotland and Scottish Widows. Portman would not offer us a loan because the property has to be the main residence of the higher-income earner, and Scottish Widows said no because my sister is not a graduate. The deal we were eventually offered by RBS was a two-year tracker pegged at 0.89 percentage points above base, giving a current rate of 5.64 per cent. The rate is high, but the best we could get without a deposit.
Lenders add a premium for loans on 100 per cent of the property, so a deposit can make a big difference to the rate. For instance, Portman offers a rate of 4.75 cent on loans up to 95 per cent. This rises to 5.74 cent on a 100 per cent loan. With the deposit, a £100,000 mortgage would give repayments of £576.54 a month; without, this rises to £635.87. However, a deposit need not be greater than 5 per cent to obtain best-buy rates. Gardner says: “Generally, best-buy rates for two and five-year fixed deals are available with LTVs (loans to value) up to 95 per cent of the value.”
The solution Cathy and I pursued, of buying with siblings or friends, is a growing trend. Many lenders, including HSBC and Britannia Building Society, are promoting group loans for up to four people as the solution to first-time buyer angst. Melanie Bien, of Savills Private Finance, says: “More lenders are recognising the need to offer group loans; they enable buyers to get a bigger mortgage and a larger deposit. Monthly mortgage payments should also be more manageable and you can share the cost of repairs and maintenance.”
But there are downsides. Bien says: “Friends fall out, so perhaps you should rent together first. Your circumstances or those of your friends might change: you might want to marry and will need to sell your share.” Buyers should get a legal contract drawn up stating how much each has contributed towards the deposit and what will happen if you want to sell up.
I would prefer to stick with sharing bottles than mortgages with my friends. But even buying with siblings is not foolproof: there is still a possibility that we will fall out or want to leave. If Theo moves out, we will lose rental income and I may have to forgo the odd holiday.
Given the potential advantages, it all seems worth it. If we keep the flat, we stand to benefit from predicted house price growth in Nottingham of 5 per cent over the next five years. The city’s reputation as the crime capital of England and Wales is worrying, but Mapperley, our area, is so far unscathed by the gang warfare and the police are being more active.
As well as giving us an investment and extricating Cathy from her high-rise, damp-ridden former address, buying together has given us a chance to bond. We used to speak once a month; now it is twice a week, with e-mails in between. I have seen her more times in the past few months than in the previous seven years. It has also placated our mother, who describes our purchase as “a weight off her long-suffering mind”.
Share-to-buy — deals that let up to four first-time buyers (FTBs) club together to get a larger loan on a more costly home; can also mean lower monthly repayments.
Shared equity schemes — offer FTBs the chance to obtain a bigger loan in return for a share of the profit when they resell their home. Mainly government-run, such as the Open Market HomeBuy scheme, but also available from lenders.
Affordability calculations — lenders assess how much to offer based on how much the buyer can afford to repay each month, instead of multiplying his or her income. Can help FTBs with low monthly outgoings.