The Government’s first-time buyer scheme explained
Being a first-time buyer usually means forking out rent, saving for a deposit and playing catch-up with ever-rising house prices all at the same time. No easy feat.
But the good news is there are a range of Government schemes available which could provide just the boost you need to make it to the first (or next) rung of the housing ladder. We’ve outlined them below.
Help to Buy
Help to Buy provides a leg-up to buyers who can only muster a 5% deposit. While the scheme is not limited to first-time buyers, the vast majority of applicants fall into this category.
When Help to Buy was launched back in 2013, there were two parts to the scheme, Equity Loan and Mortgage Guarantee. As planned, the latter part (whereby the Government offered a guarantee to banks and building societies of up to 15% of the property price to encourage them to lend larger loans) was scrapped at the end of 2016.
Mortgage Guarantee did leave a legacy, though. According to Moneyfacts, there’s been a four-fold increase in the number of small deposit mortgages available since its launch.
Help to Buy Equity Loan
The remaining part of Help to Buy is called the Equity Loan. It requires a minimum 5% deposit of the property value with the Government offering an interest-free loan of a further 20%. The remaining 75% is covered by a standard mortgage.
As an example, if you wanted to buy a £200,000 property under the Equity Loan scheme, you’d need a minimum deposit of £10,000 and to qualify for a £150,000 mortgage. The Government then provides an equity loan of £40,000.
This is how the £40,000 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 prices index) measure of inflation plus 1%
You can opt to pay fees in a single annual payment or by monthly direct debit. But bear in mind they are purely fees and will not go towards repaying the equity loan.
The idea with the Help to Buy Equity Loan is that, because you’re theoretically only borrowing 75% from the mortgage lender, rates will be cheaper than on a 95% mortgage. However, just like with the now-archived Mortgage Guarantee, don’t assume this is always the case. Make sure you independently compare mortgage deals.
When you come to sell your home (or at the end of the 25-year mortgage term if you decide to stay put), 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% increments of the property’s current market value.
The Help to Buy Equity Loan is only available on new-build properties in England worth up to £600,000. The scheme will remain open until 2020.
The Welsh version, which was due to end in March 2016, is now entering a second phase which spans until 2021 and will support the construction of 600,000 new homes in Wales. In Scotland, the original scheme was replaced in January 2016 with a new one. There is no Help to Buy scheme available in Northern Ireland.
Help to Buy London
Help to Buy London, which launched in February 2016, is a extension of the Help to Buy Equity Loan. It’s specifically aimed at people wanting to buy in London and Greater London where house prices can climb at notorious speeds.
For a 5% deposit, the scheme offers the same 5-year interest-free loan against qualifying new-build homes. The difference with Help to Buy London is that the loan is worth up to 40% of the value of a home, opposed to the maximum 20% under the wider scheme.
Help to Buy ISA
The Help to Buy ISA which launched on 1 December 2015 is designed to boost first-time buyers’ savings pots. For every £200 you save into the account, the Government will add £50. This is up to a maximum bonus of £3,000 (which applies to £12,000 of savings).
It’s important to note however (and this transpired some time after the account was launched) that the Help to Buy ISA bonus cannot be put towards your initial deposit which is payable at exchange. Instead, the tax-free lump sum will be paid directly to the mortgage lender at completion.
In other words, you’ll have to save the initial deposit yourself and use the bonus to reduce the overall mortgage amount and subsequent monthly repayments.
There are other limitations on the account too, such as a £250,000 price cap on property the bonus can be used to buy, although this rises to £450,000 in London.
Only one Help to Buy ISA is permitted per person and you won’t be able to pay into any regular ISA at the same time. However, you can use your Help to Buy ISA savings in conjunction with any other Government scheme such as Help to Buy or Shared Ownership.
Banks and building societies offer their own Help to Buy ISAs and interest rates vary so be sure to shop around. Some accounts incorporate an upfront bonus that falls away after an initial ‘honeymoon’ period, which is something to watch for when saving over the long term.
In his 2016 Budget, the Chancellor announced the introduction of the new Lifetime ISA which offers a tax-free boost of up to £1,000 a year towards either buying your first home or saving towards retirement.
Savers aged 40 or under can open these accounts which will become available from April 2017 and put away up to £4,000 each year. The Government will then boost returns by 25p for every £1 saved and pay the bonus directly into the account at the end of each tax year.
You can then opt to use your Lifetime ISA cash 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.
Starter Homes scheme
In March 2015, the Government announced the launch of a new Starter Homes scheme. Having gone quiet for a while, housing minister, Gavin Barwell recently confirmed that construction on the first Starter Homes would get underway in 2017 with first completions earmarked for 2018.
Starter Homes will be available to buyers aged between 23 and 40 who don’t own a home and have never owned one before.
The 200,000 new homes built under the scheme will be sold at a minimum discount of 20% of the market price. The discount is made possible by the Goverment’s ‘double whammy’ of offering developers the chance to build on cheaper brownfield commercial land and waiving taxes.
There’s a £250,000 price cap on homes available under the scheme, rising to £450,000 if you’re buying in London. Starter Homes cannot be resold or rented at their open market value for at least 5 years after the initial sale.
As it says on the tin, Shared Ownership schemes allow you to purchase just 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.
To qualify for Shared Ownership, you don’t have to be a first-time buyer but your household income must not exceed £80,000 or £90,000 if you’re buying in London. The scheme is available on both new-build and resale properties.
Right to Buy
Right to Buy enables council tenants with at least three years’ consecutive years tenancy (reduced from five years in May 2015) to potentially buy their home at a significant discount. You can find out if you are eligible for the scheme at the Government website.
Since 6 April, 2016, council tenants (or those living in their homes when it was transferred to another landlord) will benefit from deeper discounts if they want to buy their property. These stand at £77,900 or £103,900 if you live in London.
In his 2016 Autumn Statement the Chancellor, Philip Hammond announced a new ‘large-scale’ regional pilot of Right to Buy for Housing Association tenants which will enable a further 3,000 tenants to buy their own home at a discount. Watch this space.
Getting there without help
It is still possible to get on the housing ladder with only a small deposit without a leg-up from these types of schemes. Mortgages that are not backed by the Government are available for deposits of between 5% and 10%. And some may even offer a better rate or terms for your personal circumstances. Always do your research and compare mortgages at different deposit levels.
Finally, don’t forget to factor in Stamp Duty which is payable on all primary homes worth over £125,000