It’s never been more difficult to buy a property in the UK, with first-time buyers getting an especially raw deal.
Prices are so high that it’s become clear that many first-time buyers will need help to afford a mortgage, and that’s where government schemes come in.
The consumer problem is that in order to get a mortgage for a property, buyers must first offer up a deposit that comes to a percentage of the overall property price. With prices so high, deposits of 10%-20% (which were once common) are out of reach for the average buyer. In recent years, lenders have started offering mortgages with a 5% deposit to help first-time buyers, but due to the added risk from lenders, the mortgage deals are usually less affordable. To make buying more attractive for new buyers, the government has introduced a series of incentives to make a mortgage more affordable.
Help to Buy: Equity Loan
Equity loans mean that those at the bottom steps of the property ladder can afford a mortgage, even with a 5% deposit. How they work is the buyer puts up 5% deposit, and the government offers a loan for 20% of the property value to turn that 5% Loan-to-Value (LTV) into 25% LTV. This gives buyers access to much better mortgage deals.
The loan offered by the government is interest-free for the first five years but comes with a few conditions. First, your mortgage must be at least 25% of the purchase price. In addition, the buyer’s mortgage borrowing must be at the maximum of 4.5 times the household income. Lastly, it must be a repayment mortgage, not an interest-only mortgage.
After five years, interest starts being added onto the government loan, firstly by 1.75% then increased by the Retail Prices Index (RPI) plus 1% each year.
London Help to Buy
For those who live in London, the rising house prices have made buying a house seem like an impossibility. For this reason, the Help to Buy scheme offers Londoners a larger government loan to subsidise the mortgage. Rather than 20% of the mortgage that would be offered to those outside London, the government can offer 40%, while the buyer still puts down a deposit of 5%. The deposit will still be very high compared to those outside of London, but since the government is covering 40% interest-free, and the buyer covers 5%, only 55% of the property price will have interested added for the first five years.
Help to Buy ISA
Help to buy ISAs are designed to help those struggling to save up enough for a deposit. How it works is that you sign up for an ISA, in which you can deposit up to £200 each month. The government will then top up this deposit by 25%, meaning the government will put up to £50 a month towards your savings for a housing deposit. Do this for 5 years and you will have deposited £12,000, to which the government will then add a bonus of £3,000 – the is the maximum total figure they can offer. If a buyer is purchasing the property with their partner, they too can apply for an ISA, allowing the two of them to combine the government bonus for a total of £6,000.
Buyers can’t claim the ISA bonus until they have saved up a minimum of £1,600 (the minimum bonus is £400). The scheme is only available to properties valued at at least £250,000, or £450,000 inside the Greater London region, and only to people aged 18-40. It will also only be available until 2019.
One last important thing to remember is that the ISA bonus cannot be put towards your deposit – the bonus is paid on completion.
Not to be confused with joint mortgages or tenants in common, a shared ownership is when you share ownership of the property with a housing association, rather than a partner. Essentially, a shared ownership lets you pay for a portion of the property and pay rent on the rest.
Buyers can own between 25% and 75% of the property, then pay rent for the remaining value. The rent you pay can be up to 3% of the association’s share of the property’s value. For instance, if a buyer owns 65% of a £300,000 property, then the housing association would own 35% or £105,000 of the value. A maximum of £3150 can be charged for rent for the year, or £262.50 per month.
Most of the homes available for shared ownership are newly built, but there are some properties that housing associations will re-sell. Shared ownership properties are always leasehold properties, meaning buyers will own and be responsible for the lease. Since the properties are usually new builds, buyers can expect this to be around 99 years, but if it’s is a re-sold property, it’s important to check the lease before purchasing. If there are few years left on there then the value of the property could drop drastically after purchase.
To be eligible, the household income of applicants must be less than £80,000 (£90,000 in London). Buyers need to be aware that the housing association has the right to buy back the applicant’s share of the property if it’s less than 100%.
There are many variables that will impact eligibility for Help to Buy schemes, and the schemes tend to change quite frequently. Until recently, Mortgage Guarantees used to be available but they ended in December 2016, while ISAs will no longer be available in 2018. Due to the complexities associated with these schemes, we recommend that, if you are thinking about applying for a Help to Buy scheme, you talk to an experienced professional before you plan what you want to do. You need to make sure you are eligible and that you understand the small print. At Coreco, we have experienced mortgage professionals who can make the process as transparent as possible, as well as help you to find the ideal mortgage for your circumstances. Send us a message or call us at our office – you can find our details on our contact page.