My father taught me, from a very early stage, that there was no alternative to owning your own home (at least none that he wanted me to participate in). So, as you can imagine, I took these lessons to heart and have been trying to instil them in my children as well. Don’t get me wrong, I believe the best you can do for your kids is offer them sage-like advice and let them decide on their own as to what they want to do. But if I had my way, every new married couple should sort out how they can buy a home first before they even think about starting a family.
As we all know, unless you are born into a rich family, young couples and first-time homebuyers hardly ever have the money for it. For a long time, this was a barrier to entry into the ‘home-owners stratosphere’. But then the ‘golden mortgage age’ came about and everybody could get up to 100% financing on their homes. This meant that you could actually buy a home without the deposit.
How no-deposit home loans work
But once the real estate bubble burst and the credit crunch really hit home, those with 100% mortgages found themselves owing more than the value of their home. These days, more and more people are finding it it increasingly difficult to get loans from any lenders, let alone get 100% financing on their desired homes.
There are still some institutions that can offer you up to 95% financing. This kind of loan seems ideal for first time homebuyers with significant savings. But you’ll need to have an excellent credit rating to qualify for these loans. Thorough scrutiny into your financial history will take place and unless you are as clean as a whistle, you will not qualify. In some cases, the borrower’s parents can be used as guarantors. This makes the whole process a lot ‘easier’ and increases the chances of the borrower to get the money. But if you are unable to pay, the lender will have every right to chase after the guarantors.
Moreover, you are also required to pay for LMI (Lender’s Mortgage Insurance). This can be a little pricey. For example, if your home is going to require £234,000, then the LMI attached will be around £5,800. Bear in mind that this insurance does not cover the homebuyer in case of default. It covers only the lender. Additionally, these kinds of loans come with higher interests.
Alternatives to No-Deposit Home Loans
As you can tell by now, I am not a huge fan of 100 per cent mortgages. They are too risky, especially for young people who are still building their way to financial security. But what options do you have if saving for deposit seems out of reach (with rent prices being so expensive)?
There was this investing course I attended before called the “Property Cash Camp Intensive” by Rick Otton. He’s an Aussie who invests around the globe, and he has been transacting in the UK for probably a decade now. His philosophy is simple: “If you make a house easy to buy, it becomes easy to sell.”
Basically, you want to make the terms of the contract easy for the parties involved. For instance, because coming up with a 10-20 per cent deposit is difficult for many buyers, the contract can be adjusted so that the deposit can be paid in increments. This allows the buyer to slowly build up to the desired amount, instead of trying to come up with all the amount today.
This is just a small example of a flexible contract. Rick Otton tackles more in his site, if you are interested. But the point is that there are ways to make the buying process easy by negotiating for more flexible terms. Considering the current economy, creativity and practicality is definitely needed to avoid getting deep in debt.