CONTENTS: INTRODUCTION, 1 - SO WHY BUY A PROPERTY?, 2 - IDENTIFY YOUR STATUS RANKING, 3 - CALCULATING YOUR BUYING POWER, 4 - UNDERSTANDING THE MORTGAGE GAME, 5 - INCREASING YOUR BUYING POWER BY INCREASING YOUR STATUS RANKING, 6 - INCREASING YOUR BUYING POWER WITHOUT INCREASING YOUR STATUS RANKING, 7 - GETTING VALUE FOR MONEY, 8 - REFERENCE CHAPTER
Let me remind you of what buying power is:
BUYING POWER = (deposit you actually have) + (mortgage you’re able to get)
I showed you how to increase buying power by increasing your status ranking in chapter 5. This involved, amongst others, increasing your deposit by saving, increasing your salary by working harder and increasing your credit worthiness by redeeming credit card debt. This all seems like too much effort! There are easier ways to increase your buying power.
I have identified the following ways to increase your buying power without having to increase your status ranking:
- Vendor Incentives – Vendor Gift or Cashback
- Get a Guarantor
- 100+% Loan To Value Mortgages
- Unsecured loans
- Get a Partner
- Self Certification Mortgages – No Proof Of Income
- High Income Multiple Mortgages
- Shared Ownership Schemes
I Vendor Incentives – Vendor Gift or Cashback
This is where you basically get the mortgage lender to pay most of your deposit! This is best explained by the following example of Vendor Gift below:
Gavin wishes to buy his first property for £54,000 but he has no money for a deposit.
|Without Vendor Gift|
|With Vendor Gift|
|Deposit Required (assume 10% of purchase price)||5,400||6,000|
|Gavin’s Actual Investment||0||0|
|Shortfall Of Investment = Deposit Required minus Gavin’s Actual Investment||5,400||6,000|
|Vendor Contribution = Inflated Purchase Price minus Purchase Price||N/A||6,000|
|Actual Shortfall = Shortfall Of Investment minus Vendor Contribution||5,400||Nil|
Without Vendor Gift Gavin has a shortfall of £5,400 so he cannot buy the property.
With Vendor Gift Gavin has no shortfall. The vendor gets:
£60,000 - £6,000 = £54,000
The inflated purchase price - vendor contribution = original asking price.
His first property costing £54,000 for no money down. His borrowings are however greater than 90% loan to value. His borrowings are 90% of £60,000 = £54,000. This equates to 100% loan to value. In effect Gavin is borrowing all of his deposit from the mortgage lender. Note he is not borrowing any of the deposit from the vendor as the vendor has got his full asking price of £54,000. The vendor deposit figure is purely a notional figure. So Gavin’s buying power has risen from nil to £54,000 without changing any level of his deposit, income or creditworthiness.
This trick is completely legal but relies on the property being valued up to £60,000. This is likely because of three reasons:
- Valuers do not like to down-value a property - unless there is something wrong with it! If they think the purchase price is only slightly higher than what it is worth they will always value it at the purchase price. This is because the valuer knows that valuations are not an exact science. Valuations are based on what people will pay for a property and he will assume that if you are willing to pay £60,000 then the property is probably worth £60,000. A 10% gross inflation of the purchase price is not a lot considering you are only talking about an inflation of £6,000. For higher value properties (greater than £200,000) I would suggest a 5% vendor deposit contribution as £10,000 purchase price inflation could be contested.
- You may be getting a bargain property - i.e. the property is worth £60,000 but you are actually getting it for £54,000, hence it values up to £60,000.
- Valuers are under pressure to value properties at the purchase price - Lenders make money by lending money. If they instruct a firm of valuers that keep on down-valuing properties then it becomes difficult for the lender to lend and hence make money. The more the valuer values property at the purchase price the more money the lender makes. Especially in the current rising property price conditions, even if the valuer thinks that the purchase price is 1% or 2% inflated he will assume that it will reach the valuation in a few months anyway.
Cashback works in the same way. In the above example the deal would be structured as:
£60,000 purchase price + £6,000 cashback.
So when you buy the property you put down £6,000 as your deposit, which you may have borrowed on your credit card, and get £6,000 back when you complete the purchase enabling you to pay back your credit card company.
There are tax issues. The vendor has to declare the inflated sales price to the Inland Revenue and thus will have to pay more capital gains tax as his gain is deemed to be higher. For the vendor this may not be a problem as the Inland Revenue gives you an allowance in excess of £7,000 for a capital gain. If this inflated price does not take the gain above this allowance then there is no increased capital gains tax to pay.
II Get a Guarantor
You can get a mortgage beyond your affordability limits by getting a guarantor. A guarantor is liable for the mortgage payments and whole balance in the event of your default. A guarantor guarantees that you are a good bet. There are mortgage companies that will grant you a mortgage if you have a guarantor that has good credit. They simply credit check the guarantor as well as you and consider whether your guarantor could pay the mortgage in the event of your default.
The key points are that:
- The maximum mortgage available is calculated on the guarantor's income less existing commitments.
- The guarantor must have good family ties with the applicant and be able to demonstrate the ability to cover their own financial commitments together with the applicant’s total mortgage commitment.
- The Lender’s normal income criteria is applied to assess the mortgage, but by using the guarantor’s income as a basis for the maximum loan.
- The Lender will make an assessment of the main applicant's future earnings potential, to ensure that they the loan applied for can be covered without the guarantor's support later in their career.
- The guarantor can be released at any time providing the borrowers income covers the outstanding mortgage.
So, for example, Richard who earns £15,000 pa, a young graduate, could get a mortgage of £100,000 if his parents acted as guarantors and if Richard’s income was set to rise to £25,000 within 5 years. This could be likely if he was a graduate trainee and qualifying in 3 years after all his professional exams i.e. like an accountant or solicitor. So richard’s buying power has increased from £60,000 (being 4 x £15,000) to £100,000 (£25,000 x 4, assuming he will be earning £25,000 within 5 years).
A list of guarantor mortgages can be found in the reference chapter. You can also ask any lender if they would consider taking on a guarantor as this part of the market is relatively new. There will be more introductions of these types of mortgages in the future.
III 100%+ Mortgages
Having a deposit is advisable as there are more products available to you. If you find saving too painful then there are mortgage companies that will lend you the whole amount. There are even lenders out there that will loan more than the value of the purchase price. The excess amount over the purchase price can be used to improve the property thus pushing up the value of the house. So your buying power can go from £nil, due to the fact that you think no one will lend to you, to £250,000, the maximum 100%+ loan to value mortgage you can get. This is best explained with an example.
Joanne, who has no deposit, decides to buy a property for £100,000 but the kitchen and bathroom is in poor repair. She gets an estimate for the work and she finds a builder that will do the complete job for £5,000. Joanne decides to go for the property and apply for a 105% Mortgage. This will mean that she will get:
£100,000 to purchase the property
£5,000 to repair the property
After the repair the property will be worth £110,000 as the property is more saleable now as the property is more presentable to the market. Thus her buying power has increased from £nil to £110,000 due to the fact that Joanne took on a mortgage that was greater than 100% loan to value.
A list of all the 100%+ Mortgage Providers can be found in the Reference Chapter.
IV Unsecured Loans
As I have said earlier having a deposit is advisable. Well you can get one instantly by simply borrowing it! I would suggest that you only take on this credit (if you are borrowing from a credit card or bank) after your mortgage application has been submitted and you have been credit checked otherwise this borrowing will show up
You can get the deposit from the following sources:
|Credit Card Companies||Now credit card companies have had a lot of bad press in the past and present and will continue in future for as long as they’re around. The reason why that get bad press is not because they do anything wrong, it’s the cardholder that does wrong.|
Certain cardholders spend the credit granted on items but have no plan on how they will pay the credit card company back. Is this the fault with the credit card company or the cardholder? I would say the cardholder. Others would say these companies give credit cards to anyone and they make it too easy. Making it easy is a good thing! Why make something hard if you can make it easy.
The key to playing the credit card game is having a plan to pay them back. Many businesses have been funded by credit cards during the bad times and have saved companies going bankrupt – but you never hear about it in the press as it doesn’t make good news. I have several credit cards with a total credit limit of £13,000 which will only ever be used if really needed. I used my credit cards a couple of years ago to buy a really cheap investment property as they advance you the cash immediately. Careful use of my credit cards made me £15,000 profit!
Credit card companies are begging us to borrow. So much so they offer 0% for balance transfer. A list of these are in the reference chapter. The trick to obtaining your deposit for your first home is to:
You have to start this process after you have submitted your application form and you have been credit checked by the mortgage lender.
But please, please, please note: CREDIT CARDS ARE EXPENSIVE when you either default or go over the introductory period. Have a plan on how you are going to pay back this balance and for how long. If you do not then you can end up in unmanageable debt and then owning your own house with all its associated debts will become a nightmare. [Barclaycard offer a lifetime period of 0% until the debt is repaid but this requires you to have a minimum spend per month].
One way to plan the repayment of the credit card balance is to take up a cashback mortgage or a 100%+ mortgage which gives you cash when you buy the property on completion.
|Overdraft Facilities||It’s the same principle as the credit card trick above. You simply obtain the deposit from your overdraft provider and pay it back within a set time period.|
You may be able to get an overdraft facility from your bank. Simply ask! They will need to see your salary being deposited every week or month for at least 6 months. This should not pose a problem if they have been your bank for more than 6 months.
Unlike credit cards they do not offer introductory rates. They usually start from 5% above Bank of England base rates so at today’s rates they start from 8.5% and can rise to 15% so they do work out expensive. The beauty of an overdraft is that it can be redeemed whenever you want to. A good way to redeem it is like above with a cash gift mortgage like cashback or 100%+ mortgage.
|Personal Loans||You can raise the deposit by simply taking out a loan. The loan will be paid back over a number of years in equal instalments. You have to consider whether you can pay back the loan and the mortgage in total otherwise there is no point! So for example if you need £5,000 to put down for a £95,000 mortgage then your total cost of borrowings would be:|
£5,000 Loan £ 111.45
£95,000 Mortgage £ 412.98
Total £ 524.43
So make sure you can afford both repayments. Unlike the credit cards and overdrafts a loan is less easier to redeem as there are penalties. Sometimes the penalties are not too extortionate so it may be well worth redeeming the loan with penalty to save on interest you will pay over the duration of the loan.
Be sure to apply for the loan after submission of your mortgage application form.
|Loan from friend or family||I have been on both sides of this equation! I have borrowed and I have lent. In the first instance I borrowed £500 to kick start my first property purchase from my Mum. In the second instance I lent £1,800 to one of my good friends to clear their credit card debt. This friend immediately paid me back using his credit card cheque book when the mortgage completed!|
You’d be surprised how helpful the people are around you. I would suggest approaching your family members first and then move outside of the family once all avenues have been exhausted.
Buying power is increased due to deposit levels being increased. The size of the buying power increase can be many hundreds of thousands of pounds especially if you could not buy unless you had a deposit.
V Get A Partner
Now I’m not saying go out and get married to the next girl or boy you see or move in with your partner who you are quite frankly unsure about. I just want to show you how a partner, be it a romantic interest or simply a friend or family member, can increase your buying power.
Taking on a partner can have the following effects depending on the status of the partner and has the following drawbacks:
|Status Of Partner||Buying Power Effect||Drawbacks|
|Partner with an income and/or deposit||The deposit level increases due to the addition of their deposit. See chapter 5 on the effects of having more of a deposit.|
The amount of borrowing available increases due to the addition of their income. See chapter 5 on the effects of having more of a deposit.
Overall buying power increases due to the two impacts above.
|1. Loss of full freedom of sole ownership. When you have to sell you will need to get the partner to agree on whether you want to sell and the price.|
2. The gain on the property will have to be shared with the partner involved.
3. You will be liable for the mortgage payments if the other partner defaults.
I am involved in a TV programme which will exactly about this concept. It will be following first-time buyers put together so that they can purchase their first home together and sell within 2 years, make a gain, split the gain and then use this gain to buy their own property individually. You could use a partner in this way where you both mutually benefit. It is worth planning the exit route and only enter in to this type of agreement with people you trust.
VI Self Certification Mortgages – No Proof Of Income
Lenders can be awkward when it comes to proving your income. If you are self employed and get paid in cash it can be sometimes difficult to prove your income. If your accountant is not chartered or certified or you have prepared the accounts yourself then the lender point blank refuses that you have earned that income.
With self-certified mortgages the lender does not require proof. You simply self certify your income. Now this does not mean you lie! It means that they will rely on what you say you earn to lend to you. There is no point in getting a mortgage that you cannot afford!
Self-certified mortgages require a minimum deposit level of 10% so it is key to raise a deposit by either saving or the ways listed above. Buying power is increased from nil to something even though you cannot prove your income!
If you do require your accounts to be certified by a qualified accountant then contact Accountants Direct on (01279) 833 833. They will be happy to do this with limited supporting documentation.
The best self-certified lenders can be found in the reference chapter.
VII High Income Multiple Mortgages
Instead of going for the standard 3.5 times single income or 2.75 times joint you can go to the more flexible lenders that offer up to 5 times single salary + second income. In the reference chapter there is a list of lenders who offer greater than 4 times salary.
This increases your buying power due to the lender offering to lend more than the normal income multiple.
VIII Shared Ownership Schemes
There are many housing organisations that offer you a part buy of their homes. So you can buy, say 50% of the home, and pay a subsidised rent on the other 50%. You then simply only need to get a mortgage for 50% of the value of the house. So for a house worth £200,000 and you wanted to buy 50% of this then you would only need a mortgage for £100,000.
This way you get to live in a £200,000 house with only a £100,000 mortgage.
Combining A Number Of These Tricks To Quadruple Buying Power
So, for example, if you earn £20,000 and have a deposit of £5,000 then under standard terms you could buy a property for:
£5,000 + (3.5 x £20,000) = £75,000
If you took on a bit of advice from above you could:
- take on a partner earning £25,000
- use £10,000 from a credit card
- go for a high income multiple mortgage
- Go for a 50% shared ownership house
Then you can borrow:
£5,000 + £10,000 + (5 x £25,000) + £20,000 = £160,000
Original Deposit + Credit Card Loan + (5 x 1st Applicant’s Salary) + 2nd Applicants Salary = Buying Power
You could then buy a house worth £320,000 on a 50% shared ownership.
So you can see that buying power has increased from £75,000 to £320,000 without increasing your status ranking!
If you decided not to go for the shared ownership scheme you could still raise your buying power from £75,000 to £160,000 which is still more than double.
And if you decided not to take on a partner your buying power still rises from £75,000 to £230,000.