Q I hope you might be able to provide some insight for me as I begin my (optimistic) search for a first property. I’m 26 years old and single and a couple of years’ ago, I received a £150,000 inheritance. I have sat on it since then but have finally come to the decision to buy a one-bedroom flat in London. I was renting until a month ago but am now back living with parents to give me a chance to save enough money for legal costs and furniture while I navigate my options.
I am also in the process of finding a new job and expect to have a salary of £32,000, once I have been in the job three months. So sometime in October or November I hope to be in a position to buy a property using the help-to-buy scheme. I expect to pay about £400,000 split 37.5% deposit, 37.5% help-to -buy and 25% mortgage. I’m nervous that although I would could get a mortgage of 25% of the value of the flat, there’s no guarantee that my salary will increase enough to cover the repayments when they kick in on the help-to-buy equity loan in five years’ time and this may effect my chances of getting the mortgage. I have separate funds that will cover the stamp duty and upfront costs and so on, so this is not an issue. I’m very lucky to have this deposit but due to my salary I’m not sure home ownership is available to me.
A Home ownership won’t be an option until you are confirmed as having a permanent position in your new job because even with your sizeable deposit, you wouldn’t be able to get a mortgage. And without a mortgage, you wouldn’t qualify for a help-to-buy equity loan. To qualify for 40% equity loan assistance from London help-to-buy, you have to take out a first mortgage for at least 25% of the value of the property you want to buy. And that mortgage plus your cash deposit must be a minimum of 60% of the purchase price. The mortgage-plus-deposit minimum is 80% for help-to-buy outside London.
But as well as waiting until you have a permanent job, there’s no point formally applying for a mortgage until you have been assessed and approved by your local help-to-buy agent (although it would be worth talking to a mortgage adviser to get an idea of the size of mortgage you could afford). The assessment is used to ensure that you are in a position to afford your mortgage and the agent works to a guideline to check that your monthly mortgage costs – plus service charges and fees – are no more than 45% of your take-home pay. The mortgage must also not be more than 4.5 times your household income which is good news for you as a £100,000 mortgage would be only 3.125 times your £32,000 salary.
You don’t need to worry about your chances of getting a mortgage being affected by the interest charges on the help-to-buy equity loan because for the first five years the equity loan is interest-free. In year six, the interest on the equity loan – plus the monthly management fee of £1 which is charged from day one of having the loan – is paid to Homes England and is separate from your main mortgage. The interest charged in year six is 1.75% of the original equity loan so, in your case – with an equity loan of £150,000 – you would pay £2,625 in interest which works out at £218.75 a month. The interest rate rises by the increase in the Retail Prices Index plus 1%.