We all know that getting your foot on that first rung of the ladder is a challenge, and one which seemingly gets increasingly difficult each year as property prices have continued to rise, the average salaries don’t keep up and the average age of a first-time buyer increases (it now stands at 30 years old, up from 29 years old just 5 years ago). However, we’re pleased to see the Government are continuing to support first-time buyers with some more funding and dates being applied for the Starter Homes scheme.
“With more support than ever put in place for first-time buyers, Romans are keen to help get people on the property ladder. Dedicated mortgage advisers, a team of property experts to help source suitable homes and someone to help keep you on track throughout the purchase – the whole team will help you with your first property purchase,” comments Antony Gibson, Sales Director at Romans.
Here is a brief run through of the schemes available, including the ever popular Help to Buy scheme explained!
Help to Buy
Launched back in 2013, this scheme provided a leg up to those who are only able to bring together a 5% deposit and the Government offered a guarantee up to 15% of the property price to encourage lenders to lend larger amounts.
Although scrapped in 2016 it did leave a legacy, there have been many more small deposit mortgages available since its launch. In fact, some of the cheapest were not even part of the scheme!
Help to Buy Equity
The part of the Help to Buy scheme remaining is called the Equity Loan. There needs to be a minimum 5% deposit of the property’s value with the Government offering an interest free loan for 20% and the remaining 75% being covered by a standard mortgage. This scheme is only available on new build homes worth up to £600,000 and will remain open until 2020.
Here is how the 20% equity loan works:
- There is no interest to pay for the first 5 years
- In year 6, interest (known as a 'loan fee') kicks in at 1.75%
- The rate increases every year thereafter at the RPI (retail price index) measure of inflation plus 1%
The general idea with the Help to Buy Equity Loan is that, because you're only actually borrowing 75% from the mortgage lender, rates will be cheaper than on a 95% mortgage. However, don't assume this is always the case, you should independently compare mortgage deals.
Then, when you come to sell your home (or at the end of the 25-year mortgage term if that is sooner), the Government will take back its 20% share regardless of whether that's at a profit or a loss. You can opt to repay the loan at any time during the first 25 years but only in minimum 10% instalments of the property's market value at that time.
We have a selection of Help to Buy homes for sale via our New Homes department who sell brand new property across Surrey, Berkshire, Hampshire, Middlesex, Buckinghamshire, Oxfordshire and Greater London. Click here to see some of the homes available.
Help to Buy London
Launched in February 2016, Help to Buy London is an extension of the Help to Buy Equity Loan. House prices across London and Greater London have been known to climb at astonishing rates, so it is aimed at first-time buyers looking to purchase in these areas.
The difference between this and the standard Equity Loan is that the Government will offer an interest free loan of up to 40% (rather than the standard 20%).
Help to Buy ISA
Designed to boost first-time buyers saving pots, the Help to Buy ISA was launched in December 2015. The Government will add £50 for every £200 saved in the ISA up to a maximum of £3,000 (which would apply to £12,000 savings).
The Help to Buy ISA bonus, which is tax-free, is payable directly to the mortgage lender at completion and may not be used towards the initial deposit which is payable on exchange of contracts. So it will be no help towards the initial deposit which needs to be saved, but will reduce the overall mortgage amount and subsequent monthly repayments. Other limitations include only allowing one ISA per person, the saver is only allowed to pay into one ISA at once and the money can only be used towards property up to the value of £250,000 (rising to £450,000 in London).
You can however use this tax-free lump sum in conjunction with any other Government scheme.
Banks and building societies offer their own Help to Buy ISAs and interest rates vary so make sure you shop around!
The Chancellor announced the introduction of the new Lifetime ISA in 2016. It offers a tax-free boost of up to £1,000 a year towards either buying your first home or saving towards retirement.
Available from 2017, savers aged 40 or under can open these accounts and put away up to £4,000 each year. The Government then boosts returns by 25p for every £1 saved and pay the bonus directly into the account at the end of each tax year.
You can opt to use your Lifetime ISA savings as a deposit on a property worth up to £450,000 anywhere in the UK, so long as you are a first-time buyer. And you will be able to roll up any cash in your Help to Buy ISA into your Lifetime ISA without losing the tax-free benefits.
These mortgages allow borrowers to take on larger loans than the lender would normally be prepared to extend if a close family member is prepared to act as guarantor on the debt. Typically parents or grandparents have been offering their own homes as collateral on the child’s mortgage, but they would need on average 25% equity in their property.
Guarantors need to be mindful of the pitfalls though. Should the child default on the mortgage, the guarantor would be liable for the shortfall. In extreme circumstances, if the debt couldn’t be paid, this could lead to repossession.
Parents and family offset mortgages
With these products, parents (or grandparents) put their savings into an account linked to the buyer’s mortgage. Reassuringly, the child can’t actually access the money, but it works as a deposit on the home they are purchasing. The savings balance is deducted from the value of the loan, so it also reduces interest charges.
The benefits of this type of product? Parents don’t have to actually give their money away, though they will need to have it locked up for an extended period (typically until the buyer’s mortgage is worth only 75 to 80 per cent of the property value). But they will eventually be able to retrieve their savings back.
Make sure you compare the rates you would get with these specialist mortgages with those of typical first time buyer mortgage rates. It’s not always your best option.
For both of these mortgages, our team of experts can help search the market for you (over 11,000 different mortgages across 90 lenders) and ensure you get the best deal for your circumstances. Click here to book an appointment for their impartial advice.
Starter Home schemes
The first of the Starter Homes are due to be available in 2018 to buyers aged between 23 and 40 who don’t own a home and have never owned a home before.
200,000 new homes will be built under this scheme and will be sold at a minimum discount of 20% market value. To make this possible, the Government have offered developers the chance to build on cheaper brownfield sites and have waived some taxes. There is a £250,000 price cap on homes available under the scheme (£450,000 in London). These Starter Homes will not be able to be resold or rented for market value for 5 years after the initial sale.
Shared Ownership schemes allow you to purchase just a share of a home (between 25% and 75%) from a local Housing Association and pay an affordable rent on the part you don't own.
Under a process known as 'staircasing' you'll then be given the chance to buy back chunks as and when you can afford to until you own 100% of the home. These chunks will be priced at the home's current market value as assessed by the Housing Association (you will also have to pay a valuer's fee each time).
The scheme is available on both new-build and resale properties and to qualify, you don't have to be a first-time buyer, but your household income must not exceed £80,000 (or £90,000 in London). For more information, visit their website.
Right to Buy
Council tenants with at least three consecutive years’ tenancy will have the potential to buy their home at a significant discount under the Right to Buy scheme. Those tenants (or those living in their homes when it was transferred to another landlord) will benefit from these discounts if they want to buy the property they are living in.
Find out if you are eligible for this scheme on the Government website.
With all of these schemes and products available to first-time buyers, it’s a minefield knowing which one will best suit your circumstances. To help you better understand if you’re in a position to buy your first home, contact one of our Mortgage Advisors.