What are the alternatives to a mortgage?
When it comes to buying a property, most of us immediately think about getting a mortgage. After all, it is a concept that has been around since the 12th Century in the UK. But just because it has been around for a long time, it doesn’t mean that it is still the best solution out there. Not only that, the number of people getting turned down for a mortgage these days is staggering!
The most common causes of rejection are current affordability, poor credit history, future affordability, recent job move or down valuations. All of these reasons might seem understandable, but when you look at the workforce trends of the last decade, you’ll see that recent job moves might be the norm for the younger generations.
Compared to baby boomers, millennials don’t stay in their jobs anywhere near as long, and with the rise of the ‘flexible workforce’ we are seeing a rapid increase in people being self-employed. In the eyes of mortgage providers these are huge risks, both in terms of affordability today and in the future.
Then there are those who might have made silly mistakes in their younger days that come back to haunt them when they try to get a mortgage.
Combine all this with the fact that mortgage providers are lending less and less in proportion to people’s salaries and you’ll quickly see that it’s very unsurprising that the younger generations are being priced out of the property market.
At the time of writing, the average UK property price was roughly £278,000 and the average UK annual household income was roughly £37,000. A mortgage provider currently lends 4.5x your annual household income, meaning that, at most, you can borrow £166,500. This equates to 60% of the property value. Where are you supposed to get the other 40% from?
With this in mind, below are the current solutions for you out there in the market. This article will only explain the overview, but we do link to more details articles for each option.
Silly as it may sound, renting is a viable alternative to buying a property with a mortgage. There is a common misconception around renting being a total waste of money. However, when you consider the costs involved with buying a property and owning a property, you may realise that actually renting gives you lots of benefits that may outweigh some of the downfalls.
In terms of pure accommodation costs, renting is more expensive than buying a property. According to the HomeLet rental index, the average rent paid in the UK was £1,069 per calendar month in February 2022. On the other hand, the average mortgage is around £750 a month.
These numbers are somewhat misleading given the vast difference in property and rental prices around the UK, but in general they hold up. Also, there are other costs besides the mortgage associated with buying a property, such as Stamp Duty, solicitors fees, moving costs and maintenance costs.
Want to read more about the pros and cons of renting? Read "Should I rent or should I buy?
1. Buying with someone
This isn’t an alternative to a mortgage per se, but rather a way to boost your mortgage application and potential borrowing. With house prices soaring as much as they have done recently, it is no longer just couples that are buying a property together but also friends!
There is one main thing to consider when deciding to buy with someone, and that is whether to be tenants in common or joint tenants.
Joint tenancy is the simpler of the two. It means that you’ll have equal rights to the entire property. If either party dies whilst in joint ownership, their portion will automatically go to the other owner. As such you might see this be more common with spouses who share all of their assets.
Tenants in common
If there is an uneven split when it comes to the contributions made towards buying the property, you might prefer to be tenants in common. This means that you will specify what percentage of the property is owned by whom. I.e. if you put in a larger deposit or have a higher salary you might own 75% of the property. This can change over time if circumstances change, and you can reassign the proportions, however, unlike a joint tenancy, this is all pre-agreed.
Is it a good idea to buy a house with someone? find out more by reading our blog post.
2. Guarantor Mortgage
When a bank chooses whether to lend you money, the main thing they are concerned about is whether you are going to have enough future income to be able to pay off your debt. If you cannot, they will repossess your home, but that’s no good to them, as this is an expensive process and even once they do have it, they need to sell it in order to get their money back.
One way to mitigate their risk is for you to nominate a guarantor on your mortgage. This is essentially somebody, most likely a family member, who commits to stepping in to support you if things go wrong.
How does it work in practice?
If you are lucky enough to have somebody to do this for you, they will sign a legal document stating that they will make repayments if the borrower cannot. They will likely also be using their own home as collateral or ‘security’ against any missed payments you may have.
What if they don’t own a home?
In this case, they will likely have to put a significant amount of money into an account with the bank that is lending you the money, to ensure that they have the funds to bail you out.
Who does the home belong to?
Your guarantor won’t actually be named on the deed of the property, so it will be fully yours. They are only there to support you in case things go wrong.
Should my parents guarantee my mortgage? Read more here.
Help to Buy government schemes
1. Shared ownership
Shared ownership was rolled out by the government to allow people to purchase whatever proportion of a property they can afford today, and pay rent on the rest. You can find the finer details directly on the government website here.
In a nutshell
Say you want to purchase a property worth £100,000, but you can only afford to get a mortgage for £70,000 and have £5,000 in savings, then you can buy 75% of that property and a housing association in collaboration with the government will own the rest. That means that you will have to pay rent on the 25% you don’t own.
Want to read more about the details of it? Read more about how shared ownership works.
2. Equity Loan
The Help to Buy Equity Loan is similar to Shared Ownership, in that it bridges the gap between what you can afford and the property price. However it works in a slightly different way. You can read more on the government website here.
In a nutshell
Similarly to the Shared Ownership example, if you want to buy a property worth £100,000 and you can only afford £70,000 on the mortgage and have £5,000 saved up, then the government will loan you the remaining £25,000. Unlike Shared Ownership, you do not have to pay rent on that, because it’s not owned by a third party. Instead, it is an interest only loan, which you have to start paying for 5 years after you move in. Interest only means you do not have to repay the debt, but just the interest costs.
For the full explanation, read How does the Help to Buy equity loan work here.
1. Rent to Buy
This is a concept that has gathered popularity in the US over the past few years, and is now springing up in other countries, including the UK. There are many property startups that are trying to replicate the model and although they may differ in details the concept is fairly similar amongst most of them.
In a nutshell
The Rent to Buy provider allows you to choose any home you like (some may have limitations) and will purchase it for you. They will then agree a purchase price at which you can buy the home back from them in a predetermined period of time (usually 3-5 years). In that period of time you pay a monthly fee that is part-rent part-purchase so that by the end of the period you will own enough to have a deposit for that property.
You can read more about how Rent to Buy works here.
2. Home Purchase Plans
You can find banks that do these, but some private lenders are also beginning to offer alternatives to this.
In a nutshell
Instead of the bank lending money to the customer to buy a property, the bank purchases the home in partnership with the customer. In this case it’s not a bank but a private provider. Rather than paying interest, the customer pays rent on the proportion of the home they don’t yet own and every month they buy up more of the property.
Intrigued? Read more about how a home repurchase plan works
3. Gradual homeownership
Perhaps the simplest of them all as a concept, gradual ownership is similar to the other private alternatives in that you can pick any home you like and you will part own part rent.
In a nutshell
With gradual homeownership, you find a home in the open market and your private provider will buy it for you. You are normally required to pay a deposit, which on day 1 is how much you own. Say that is 5%, you will pay rent on the 95%. Unlike Rent to Buy or Home Purchase Plans, you are free to increase your equity stake as you please rather than on a strict schedule.
Want to find out more? Read: what is gradual homeownership.
How does Gradual Ownership worth with Pluto?
The main difference between Pluto and most other private providers of mortgage alternatives is that Pluto does not invest with you. We do not buy the properties with you nor do we lend you any money. Instead we pair you up with somebody who can buy the home with you.
This may sounds strange, but we think it will be key to ensuring that you pay a fair price for your home. If we were to buy a home with you or for you, there would be a conflict of interest when it comes to deciding rent, or a valuation for the property, whereas by remaining neutral we can ensure that you always pay a fair price.
Beyond this, we try to keep things simple and are in line with other gradual ownership providers. If you would like to read more visit our website.