Saving for that first step on the housing ladder

In many areas of the country, the housing
market has been in the doldrums. Many people hoping for a quick sale have seen
their home languish on the market for many months.

While the most recent data suggests that
average prices are rising, the gap between the North and the South is wider
than ever – a divide that has been exacerbated since the effects of the 2008
banking crisis became evident.

Time
to buy?

All this means that it’s broadly a buyers’
market out there at the moment. And with predictions that housing ownership is
set to slump to 63.8 per cent over the coming decade, close to 1980s levels,
and average prices and rents expected to rise by some 20 per cent over the next
five years, it could be a good time for potential first-time buyers to start
thinking about getting onto the housing ladder.

It could pay to bear in mind that events can
move quickly and therefore you should consider your unique personal finance
situation before making a big decision. However, if you have spare money, then
saving in earnest with the intention of building up a healthy deposit may be a wise
decision. This is especially the case since the required deposit size has gone
up in recent times.

While just a few short years ago many people
were able to buy without any deposit at all, and 100 per cent mortgages were common,
today more cautious lenders are asking for 10 per cent deposits as a minimum. Indeed,
recent reports have suggested that only a third of mortgage applications by
first-time buyers who had a deposit of less than 25 per cent were approved in
September 2011, around 10 per cent fewer than in September 2010.

Though some lenders are apparently starting
to target first-time buyers who have only a 5-10 per cent deposit, some
analysts are suggesting that this may not be the best way to get onto the
housing ladder. Experts are warning that in a volatile housing market, buying
with a small deposit could see first-time buyers falling into negative equity
if prices fall, as house values would not have to decrease by much to fall
below the outstanding mortgage.

Reasonable
savings

All things considered, it stands to reason
that the more you have saved up, the better your position will be when it comes
to sitting down with your bank or building society – and the better your chance
of weathering any economic storm without drowning in a sea of negative equity.
You may like to consider saving into an ISA
to maximise your savings for a deposit. While a cash ISA is effectively a savings
account where the interest is tax-free, a stocks
and shares ISA allows potentially greater returns on your money –
though, as with the housing market, your investment may go down as well as up.
You could also consider saving into a fixed rate or flexible bond; the latter
allows you to withdraw up to 30 per cent of your funds without penalty.

And when it comes to buying, you
might like to consider an offset mortgage. This combines your savings and your
mortgage, setting the savings against the outstanding mortgage debt. Interest
is only charged on the balance remaining, which means overall interest is
reduced and you will be able to pay your mortgage off earlier. You still have
access to your savings – if you withdraw money, the mortgage balance will be
adjusted accordingly. Your mortgage product may require the payment of an early
repayment charge on early redemption (either fully or in part) or transfer to
another scheme or product.

This article has been written for
information and interest purposes only. The information contained within this
article is the opinion of the author only, and should not be construed as
advice or used to make financial decisions. Expert financial advice should
always be sought and any links contained within this article are included for
information purposes only.

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Barclays moves, invests and protects money and provides loans online,
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