Money Help Desk: Has climate improved for first-timers?

Would we qualify for a mortgage and, if so, how much could we borrow, and what kind of property might we be able to buy? Would it help if we asked one of our parents to guarantee the loan?

SW, Edinburgh

Edinburgh mortgage adviser John Postlethwaite of Punter Southall writes:

If you are looking to purchase your first home on your own, the minimum deposit you would need to find is 10 per cent. The good news is that the Moneyfacts comparison website recently reported "the availability of mortgages where you have a 10 per cent deposit has doubled since May 2009 and lenders have been progressively relaxing their lending criteria".

Based on your incomes of 25,000 each, assuming you do not have any other financial commitments, you may be able to borrow up to 200,000 (dependant on your credit score). You would, therefore, need a deposit of 23,000, plus associated purchase costs such as stamp duty. You should ensure that you can afford the monthly costs which, based on a repayment mortgage of 200,000 over 30 years, would be about 1,200 per month for two years fixed at a rate of 5.98 per cent with the Nationwide. This scheme comes with a 495 application fee.

Alternatively, if you require a guarantor, any borrowing is based on the guarantor's ability to support the mortgage in conjunction with their own financial commitments, not yours.

Although there is a greater number of mortgages available if you have a 10 per cent deposit, the more deposit you have the lower the interest rate will become. If, for example, you had a 20 per cent deposit, a two-year fixed rate would reduce to approximately 5.14 per cent.

Should providing a larger deposit prove difficult you could consider shared equity or shared ownership. There are two types of shared equity available: Open Market and New Supply Shared Equity. Shared equity aims to provide help to people on low incomes who wish to own their own home but who cannot afford to pay the full price. It is part of the range of assistance under LIFT, the Low-cost Initiative for First-Time Buyers.

The Open Market option was to help first-time buyers who could raise between 60 per cent and 80 per cent of the value of a home by topping up their finances by the outstanding amount. The government recouped the money when the property was sold by taking a share of the proceeds. Unfortunately, funding for this scheme ran out for the financial year 2009-2010 due to its popularity and we await news on whether funding will be available for 2010-2011.

The alternative could be the New Supply Shared Equity scheme run through social landlords such as Link Homes for Edinburgh and the Lothians. You choose to purchase an initial share – again, normally 60 per cent to 80 per cent – and the housing association receives a grant from Communities Scotland to pay the rest. The scheme is totally separate from the Open Market option and is available on certain developments run by social landlords. For any equity share scheme you will be assessed by the social landlord as to whether you qualify.

Shared ownership enables you to buy an initial share of the property, normally between 25 per cent and 75 per cent, and pay rent on the proportion you do not technically own. Rent is currently calculated at the equivalent of a 2.75 per cent charge. Over time, if you want, you can purchase more equity in your home, although there is no obligation to purchase 100 per cent.

If you are considering either shared equity or shared ownership, mortgage lenders still require you to have a deposit of at least 10 per cent of the percentage of the property you are purchasing.

Whichever way you decide to purchase your first home, I would always recommend getting an agreement in principle prior to making an offer. This involves you approaching a lender with your chosen proposition prior to making an offer and securing a property. They will conduct their affordability and credit checks to confirm whether they are able to lend you the requested amount of mortgage.

This will give you peace of mind that the mortgage you require will be affordable and that you are able to borrow the required level before committing yourself to a purchase.

Is tax liability too great for me to take pension early?

I TURNED 60 at the end of last year, am still working and, all being well, intend to continue until age 65. I have worked for several employers during my working life and have a number of works pensions, a personal pension and a number of AVCs.

The majority of these pensions are designed to pay out at age 65. However, one pension was designed to mature at age 60 and it is this one that I am undecided about.

It is a money purchase scheme with Friends Provident and when I was made redundant six years ago the scheme became "paid up" and no further contributions were made.

When I received the paperwork regarding my options at age 60, I asked my financial adviser for his opinion. His advice was that as I didn't need the pension at the moment I should defer taking the benefits until retirement, as the monthly payments would be reduced by 40 per cent income tax. I did defer the pension. However, having studied the information from Friends Provident in more detail, I am less confident that this is the best action to follow. My interpretation of the situation is as follows:

Against taking the pension:

Annuity rates are very low at the moment and hopefully will increase by the time of my retirement.

At age 65 I should get a better rate per 10,000 for my fund.

For taking the pension:

I have checked the value of the fund from annual statements since the policy was made "paid up" and am monitoring the value on a regular basis. At the moment, the fund is as high as it has ever been. In an uncertain economic climate there is no guarantee that the fund will continue to grow and at retirement it may be worth less than it is now.

As people are living longer it may be that actuarial rates are revised by the time I reach 65 and I would not get a rate very different from now.

&149 I will have the tax-free cash and the monthly pension to invest and grow until retirement.

BT, Edinburgh

Tom McPhail, head of research at Hargreaves Lansdown, writes:

This is an interesting question, as it touches on several issues. On the very last point – taking tax-free cash to invest, it is hard to see how you will get a better return than you do at present. The money is currently invested in a tax-exempt fund; if you take it out then you will have to reinvest it. Will you enjoy more favourable tax treatment? Probably not.

Your pension fund should be invested for the future, not the past. How will it perform going forwards? If you are in cash then probably not very well. If you are in a well chosen equity income or strategic bond fund then perhaps a little better. You have had a good run over the past ten months; that doesn't automatically mean you should cash in now.

All other things being equal, you can expect to get a better annuity rate in the future simply because of your age. Of course you may die in the interim, but if you do then you probably won't worry about the annuity you have missed out on. Rates may pick up in the short to medium term, as a result of rising gilt yields, incipient inflation and a fiscally incontinent government. On the other hand, in the medium to longer term, rates may still push downwards as a result of improving life expectancy and tighter reserving requirements from European regulators.

Unfortunately I don't know when or whether these possible outcomes will come to pass. In the meantime, paying 40 per cent tax on income you don't currently need doesn't look so good to me.