What help can first-time buyers get to climb on the housing ladder?

It’s a tough market for starters. House prices remain high despite forecasts of double-digit declines this year, while mortgage rates are significantly higher than two years ago, putting further pressure on affordability.

At the same time, the cost of living and 10 percent inflation continue to weigh on household budgets and rents are still rising while there is a housing shortage.

The average home in the UK currently costs 9.1 times median income, according to a report by wealth manager Schroders, the most expensive in 147 years.

However, demand from starters is still high. Average home prices for typical first homes rose 0.7 percent during the year to April, compared to a 0.1 percent decline for movers.

Despite the challenge of making a down payment, rising rental costs mean homeownership can still lower many buyers’ monthly expenses.

So what options are there for first-time buyers struggling to make enough down payment?

One possible solution has been offered by Skipton Building Society, which has just taken out a mortgage for 100 per cent of a property’s value, aimed at tenants who can demonstrate that they can pay rent.

However, this will not be for everyone as the affordability criteria are strict and there is a greater risk of negative equity when borrowing such a large amount.

We look at the products and schemes currently on the market that are designed to help people up the housing ladder.

The 100% mortgage

Skipton made headlines by announcing his 100 per cent loan, which he says is designed to ‘break the bike rental trap’.

It is the first mortgage of its kind since the global financial crash of 2008 and allows buyers to borrow the full value of their home on a five-year fixed deal of 5.49 per cent up to £600,000.

However, they need a spotless credit record and the amount they can borrow is strictly controlled. Skipton says a single applicant will not be accepted if they pay more in monthly mortgage payments than they previously did in rent.

David Hollingworth of mortgage broker L&C said: ‘The rent payment will place a limit on the loan amount, but the borrower will also have to demonstrate that they can meet standard affordability requirements based on rental income and expenses.

So it’s possible that the income would support a larger mortgage, but the rent would limit the amount available on the 100 percent deal. Similarly, the rent could theoretically allow for a higher loan, but the income may not be enough to reach that maximum.”

There is also the risk of negative equity, where the outstanding mortgage is worth more than the real estate, if house prices fall.

For those who can put down a 5 percent down payment, there are other deals on the market with significantly better interest rates.

> Compare the latest mortgage rates with our search function

Deposit mortgage

In the aftermath of the 2008 financial crisis, lenders pulled their zero-deposit mortgages from the market, considering them too risky to continue lending.

Although Skipton’s is the first pure 100 percent deal, zero deposit mortgages already existed on the market based on a guarantee system.

With a guarantee product, a family member or friend with an owner-occupied home is listed on your mortgage.

An example is Barclays’ springboard mortgage. This home loan works by hooking a friend or family member for missed payments.

They will either have to deposit equity in their own home as collateral for the borrower’s mortgage, or put money equal to 10 percent of the borrower’s mortgage value in a linked savings account.

There are currently 15 zero-deposit products on the market, accounting for just over 0.3 percent of UK mortgages, according to financial data company Moneyfacts.

This is one of the ways family members can help children or grandchildren move up the ladder without having to immediately put money down for a mortgage – although their money and property could still be at risk if the borrower gets into trouble.

Shared Ownership Scheme

Shared ownership is a government-backed arrangement that allows someone to purchase a percentage share of a property.

The scheme is only open to buyers who cannot afford the down payment or mortgage payments on an open-market home. Shared ownership homes are usually managed by housing associations and they will check that the borrower meets these criteria.

It does not mean, as the name suggests, that you have to share your property with other people. Instead, you own part of the property and pay rent on the rest.

Buyers typically buy between 25 and 75 percent of a home with a mortgage and then pay rent on the remaining portion to the housing association. On some properties, the share purchased can be as low as 10 percent.

When buying through shared ownership, you still have to make a down payment for the share you own, just like any other real estate purchase.

Mortgage guarantee scheme

In December last year, the government extended the mortgage guarantee scheme until the end of 2023.

Through the scheme, the government lenders provide lenders with a financial guarantee designed to encourage them to offer riskier 5 percent mortgages.

It can be used for homes worth up to £600,000 and is open to first-time buyers and movers. In practice, there is little difference for the borrower between a mortgage guarantee scheme and a 5 percent deposit loan outside the scheme.

To date, it has been used by more than 24,000 households. It was first introduced in April 2021 to help savers get up the real estate ladder in the wake of the pandemic, as lenders withdrew their 95 percent mortgage deals.

Major lenders, including Halifax and HSBC, are part of the plan.

> View our starter guide to taking out a mortgage

Rent to buy

In addition to the larger, often government-backed schemes, there are also a number of local community-based initiatives to help start-ups.

For example, Cambridge Building Society offers a rent refund scheme. Launched in 2019, it gives local first-time buyers 70 percent of their rent back after three years to use as a down payment to buy a home they might not otherwise be able to save for.

Housing associations also offer rent-to-purchase options. An example is Peabody, which allows you to rent a house at a 20 percent discount and own it in joint ownership after two years.