Now that the government’s main mortgage scheme for first time buyers Help to Buy has ended for new applications – people have been left wondering if it will be replaced and if so, what with? And what other mortgage help is available?
So firstly, what was Help to Buy and how did it work? Help to Buy was a government scheme to help first time buyers buy a home with a 20% loan deposit, with buyers making up a minimum 5% deposit themselves. It was only available to first time buyers (it was open to all initially) on new build properties only. The 20% deposit from the government was no gift but it was an interest free loan for the first five years. After the interest-free years, there was a 1.75% fee on the outstanding amount as interest. This fee increased each year by RPI plus 1% and only repaying the interest, not the equity. This loan was repayable at 20% of the property’s value at the time of repayment – meaning if your home went up in value as they usually do in normal circumstances, you repay more. Any good mortgage adviser should have always advised a client about repaying it before using Help to Buy.
Currently nothing has replaced this mortgage scheme for first time buyers. There is talk of a Help to Buy self-build scheme being introduced but this means building your own home, which many of us don’t have the time, energy, or capacity to do.
I feel confident that there will be a full Help to Buy replacement at some point but that will very much depend on the economy, government timescales and their plan for housing. So, whilst first time buyers wait, there are still two main options available.
The traditional way – preferable
Many first time buyers believe they are a long way off saving for a deposit for their first home but with mortgages still available with only a 5% deposit on second hand homes, it can be more achievable than you might think. The reason I say a second hand home is simply because most lenders will want more than 5% deposit for a new build home as their risk increases.
So, let’s take this as an example for a traditional way of getting on the property ladder;
House priced at £300,000 with a 5% deposit of £15,000 will leave you with a £285,000 mortgage.
The pros
You DO NOT have to pay back 20% property’s value
You have the potential to one day own the entire property
The cons
The more mortgage you need, in this case 95%, will increase your mortgage rate
With an increased mortgage rate, your monthly payment will be higher
The property must be more than 2 years old (a second hand property)
Shared ownership
A shared ownership mortgage is a good option for single people who can’t afford to buy on their own, those coming out of separation or other circumstances where they can easily demonstrate that they require shared ownership as a means to buy a home.
Shared ownership is a way of buying only a share of a home and rent the other share from a housing association. So, for example if you buy a 50% share of a home valued at £300,000 you would only need a deposit of £7,500 (5% of £150,000). A much smaller deposit than if you were buying without the use of shared ownership. The remaining share in rent is calculated by the relevant housing association and is certainly lower than renting from a private landlord. But don’t forget fees and costs will still be required on top of your deposit!
The pros
Low deposit required depending on the share being purchased
Shared ownership is designed to be affordable
In the future it is possible to sell your share when you want to move on
You can buy more of your share, this is known as ‘staircasing’ where you can buy more of the property over time.
The cons
There is an additional interested party – the relevant housing association
Rent is payable in addition to the mortgage
Setting it up usually incurs a higher solicitors charge for the additional work
All in all, there are still options available to first time buyers looking to get on the property ladder and probably more to come too. The bigger deposit you start with is always going to hold you in good stead as that lowers the risk for mortgage lender. But my last piece of advice is always speak to an expert mortgage adviser who can look at your individual situation and advise you on what might be best for you.
Maybe you’re closer than you think and would like to know more? Perhaps you’ve got your deposit saved and are ready to start the process? We’d be delighted to answer any of your questions. Get in touch with us on 0300 981300 or email us on hello@vantage-mortgages.co.uk
