First-Time Home Buyers Look To Complex Funding Schemes
The Law Of... understanding modern house purchasesMark Underhill – our Conveyancing Operational Manager – takes a look at the issues facing first-time buyers and their options for getting on the housing ladder.
Rising House CostsResearch undertaken by Simpson Millar
has revealed today's first-time house purchases have become something of a tangled affair. The cost of housing in this day and age has all but stifled the flow of new blood into the market, with those who do not already own a property unable to secure the high deposit and acquire the mortgage necessary to make a purchase.
This desperate state of affairs has seen the rise of a new trend in house buying, with multiple parties coming together to finance the purchase, leading to deals, which, if not embarked upon with due care and attention, can lead to major issues further down the line.
A Legal Headache
One of the most common problems with sharing ownership on a property arises from uneven deposits – where one party contributes a higher amount towards the deposit than the other. This is often the case when friends decide to pitch in together and buy a house
. The problems start when the time comes to sell, leading to disagreements over who owns what share of the property.
Our research has shown that:
- 33% of joint buyers putting down uneven deposits avoid formal legal agreements that would protect everyone's interest in the property
- 18% say they would avoid a legal agreement for fear of 'damaging trust' and causing relationship strain
It might seem the noble thing at the time, but it counts for nothing when everybody has fallen out over the sale, with the threat of court action looming over what were once amicable relationships.
A legal contract is essential to ensure that each party knows right from the start what percentage of the property they own. Seeking expert legal advice shouldn't be viewed as a sign of mistrust, but simply safeguarding the interests of everybody concerned. It should be accepted as common sense and the right thing to do in circumstances where the complex nature of the investment requires a deeper understanding and level of protection.
The complexity of some of these arrangements is borne out by the fact that almost half of first time buyers are expecting to deploy three or more additional means by which to make their purchase. These can be a combination of anything, such as gifts, parental loans, inheritance windfalls, buying with friends or family members, shared ownership with housing associations or Government Help to Buy schemes
.The proportion expecting to use at least two of these methods has recently risen to 70%.
The Government Help to Buy Alternatives
As mentioned, there are a number of Government Help to Buy schemes available to the first time buyer. Over 50% of those attempting to get on the housing ladder expects to use at least one. They are as follows:
- Help to Buy: ISA – Available from a range of banks and building societies, this option sees the Government boost your savings by 25%, allowing you to save up to £200 per month once you have opened an account. The Government bonus is capped at £3,000 and you are allowed to deposit a lump sum of £1,200 in the first month
- Equity Loans – With this option, the Government will lend you up to 20% of the cost, meaning you will only need a 5% deposit and a 75% mortgage to cover the remainder. This scheme is available on new-builds only
- Shared Ownership – The Shared Ownership scheme allows you to buy a share in the property, between 25% and 75% of its value, and pay rent on the remainder. It is open to anybody whose household income is less than £80,000 per annum or £90,000 if you live in London. The scheme also allows you to buy bigger shares if and when you can afford it
- Mortgage Guarantee – This option operates in the same way as a standard mortgage, but offers the lender the opportunity to purchase a guarantee upon the loan. This is to encourage the banks etc. to offer higher loan-to-value mortgages (80-95%), which were a casualty of the 2008 financial crash. As with any other mortgage, you remain fully responsible for the repayments
- Lifetime ISA – The Lifetime ISA is set to be launched in April 2017 and will be available to anyone between the ages of 18 and 40. It allows you to deposit up to £4000 per year, with an annual bonus of 25% (up to £1000) until the age of 50. This account can be used either to save for a first home worth up to £450,000, or for tax-free withdrawals once you've turned 60
Mark Underhill says:"The fact is the average house price is now 9 times that of the average income, rising to 20 times that in London and the South East. These schemes offer something of a lifeline to people who would otherwise have no means of buying a house of their own."
"But the complex nature and various sources of funding mean you must get the legal implications ironed out beforehand, which means something in the form of a watertight and legally binding contract that spells out who owns what share, how much mortgage repayments will be and what percentages will go to who in the event of a sale."
"Unfortunately, not everybody appreciates the necessity for a home buyers 'prenuptial', which has resulted in a few nasty shocks and one or two messy court cases further along the line."
Ensure you are Legally Protected when Buying your First Home
Nobody wants the prospect of an acrimonious court battle hanging over them. If you are considering a complex method of funding for your first home, you should speak to an independent legal advisor such as Simpson Millar first.
We can offer expert and impartial advice on all the options available to you, as well as answering any other questions you might have with regards to conveyancing
.Simpson Millar is a full service law firm with a nationwide reach, providing professional legal assistance whatever your requirements.