Getting on the Property Ladder

There are a couple of myths which need to be set aside that stop many people even considering trying to get on the ladder.

• Myth: You need a 5% deposit
• Myth: You can't afford to buy where you want

Knowing that the market is rising and will continue to rise over the long term means many buyers assume they will never be able to buy a property in an area they want and so give up and resign themselves to years of renting.

The Deposit for Buying a Property

Almost everything you read will tell you that in order to buy your first place you will need a cash deposit of between 5 and 10%. As such many first time buyers wait and save while pouring money down the drain in rent. There are three ways round this:

• Buy in a new development where the builder offers to pay your deposit
• Get a mortgage for 100%+ of the property value
• Buy somewhere that you don't want to live!

Buying Property on a New Development

Reading the papers and surfing the net will give you no end of new developments where the builder is offering special deals on selected plots. These may be free flooring, stamp duty covered, or more significantly a 5% or 10% deposit paid. Many buyers avoid these because their dream property is a twee Victorian flat with fireplaces and walls that seep period features.

Remember that you are not looking for your ideal property, you haven't got the deposit so by definition you cannot afford it. You are looking for a stepping stone to your ideal property. If you are also financially stretched, even if someone else would be happy to pay your deposit on that lovely Victorian flat, what happens when the roof needs to be replaced and each leaseholder has to find £5,000?

The beauty of new developments is that they have little character. They are extremely cheap to maintain unless you are paying for the upkeep of a communal gym, porterage, swimming pool, etc. Everything inside is also usually guaranteed for at least twelve months and the fabric of the building (roof, walls, foundations, etc.) are usually guaranteed for ten years.

They will rise in value in the same manner as the rest of the market and so within a few years it should be possible to either re-mortgage or sell and use the equity to put down that 5% deposit on your dream period property.

Do not however assume that the new development will rise in value so fast you will be able to sell it as soon as it is ready and make a small fortune. This is and has been the case in a large number of off-plan purchases but it is not guaranteed. To see some examples of places where it did not work see Buying Property for an Investment.

100% Mortgages

If you shop around enough you will find 100% mortgages, even 125% mortgages.

These products are often frowned on as taking the property market back to the bad old days of the early 1990s but as you can see from Understanding the Property Market, even if you had bought a property at the height of the boom, you would still be significantly better off today. Another way to look at it is this:

• Scenario One:You spend three years saving up a deposit because you don�t want a 100% mortgage and buy a flat for £200,000. Three years of renting could easily have cost you £36,000.
• Scenario Two:You spend three years saving for a deposit and spend £36,000 on rent but the market moves down 10%. You save £20,000 on the property you were looking to buy but with the rent taken into account the delay has still cost you £16,000.
• Scenario Three:You spend three years saving for a deposit and the market moves up 10%. You have lost £36,000 in rent payments at £20,000 in capital gain. A total cost of £56,000.
• Scenario Four:You buy a flat for £200,000 with a 100% mortgage and three years later it has lost 10% of its value because the market has fallen, the total cost to you is £20,000 but you have a place of your own and you have already paid off some of the loan.

In almost every scenario you would have been better off to buy than wait and even where the market falls (and you have waited) your savings are insignificant compared to the costs where the market rises.

125% mortgages are also useful in that they provide you with extra capital to improve the property. Done properly this will secure your investments value. Further it may help rid you of credit card debts and other high interest loans that were stopping you raising the deposit in the first place.

If you have no debts then the extra 25% could even be the deposit on your dream property. Within the space of 6 months you could have gone from owning nothing to lording over the embryonic beginnings of a property portfolio.

100%+ mortgages are not the evil that they are painted with but the press does like to jump on stories of people who have used them and then run into financial problems. This is simply confusing very useful products with people who cannot manage their finances. Don�t let yourself get confused as well. See The Media and Property Prices for more on this.

Buying Property Where You Don't Want to Live

Who says the first property you buy has to be one you actually live in? You can, for example, buy a property anywhere you can afford it. Rent it and wait for it to rise in value. You can then sell it or re-mortgage it to provide the deposit and/or purchase price for the place you actually want. Remember a canny buy in a particular area means you could outpace the prices in the place you want to live. For example in E3 between 2000 and 2004 the average price of a flat rose from £108,952 to £L178,411 or 64%. Over the same time a flat in SW1 moved from £338,632 to £444,654 or 31% .

E3 is not the area most would have wanted to live back in 2000, but it was, still is and always will be three stops from Liverpool Street on the Underground. If you had bought and rented a property out there while you yourself rented a different place where you wanted to live you would be over £70,000 better off. An extra £17,500 per year that you would not otherwise have had to put towards your dream home

This idea is slowly beginning to catch on with people not only starting to buy rental investments elsewhere in the city but also in other cities where prices are expected to increase more rapidly such as Manchester and Birmingham. Those who pursue the out of London option have become known as Mouse Holders. This is something to do with the way City Mice become Country Mice, apparently!

The out of town option has become more attractive because for Buy-to-Let mortgages you will need a 15%+ deposit and this is more affordable with cheaper properties elsewhere in the UK. The downside is that a property three hours drive away is difficult to manage or find tenants for and so you will have to pay agents to carry out most of the work for you.