Struggling to get a foot on (or up) the property ladder? Here’s our simple round-up of government schemes that could provide just the boost you need.
Being a first-time buyer can often mean paying rent, saving for a deposit and keeping up with house prices all at the same time – no easy feat.
But there’s good news too.
As well as a stamp duty break on the first £300,000 of all homes worth up to £500,000, the Government offers a range of homebuying schemes aimed at first-time buyers, as well as existing homeowners looking to move up the ladder.
Here’s a round-up of each scheme and how it works.
Help to Buy
Help to Buy offers a boost to first-time buyers and home movers who can only raise a 5% deposit.
When Help to Buy was launched back in 2013, there were two parts to the scheme; Equity Loan and Mortgage Guarantee.
As scheduled, the Mortgage Guarantee (where the Government offered a guarantee to mortgage lenders to encourage larger loans) was scrapped at the end of 2016.
Help to Buy
Help to Buy Equity Loan is the only arm of Help to Buy that is still available.
The scheme requires you put down 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.
Help to Buy mortgages are offered by most major lenders including Santander, Barclays and Halifax, as well as some smaller building societies such as Teachers and Newbury.
For example, on a £200,000 property, you’d need a minimum deposit of £10,000 and the means to qualify for a mortgage of £150,000. The Government would then plug the gap with an equity loan of £40,000.
How the 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 choose to pay interest in a single annual payment or by monthly direct debit. But, either way, these payments are ‘fees only’ will NOT go towards paying off 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, interest rates will be cheaper than on a standard 95% mortgage.
However, don’t assume this is always the case. Make sure you compare mortgage deals, either on a comparison website or using a broker, first.
As well as truly understanding what you are getting in to with Help to Buy, it’s also important to consider any potential alternatives than might be available. Find out more with these 5 checks to make before using Help to Buy.
Repaying the equity loan
The Government will take back its 20% share of your home, whether that’s at a profit or loss, either when you sell or at the end of the 25-year mortgage term if you decide to stay.
You can opt to repay the loan before this but only in minimum 10% increments of the property’s current market value. This is known as staircasing.
Find out more about what happens when you have to pay your Help to Buy equity loan back.
The Help to Buy Equity Loan scheme is only available on new-build properties in England worth up to £600,000.
The current scheme will remain open until March 2021.
- Help to Buy (Wales) also offers a government equity loan worth up to 20%. It applies to new-build properties up to a maximum value of £300,000. The scheme closes in March 2021.
- Scotland’s Help to Buy, known as the Affordable New Build Scheme, offers a government equity loan worth up to 15% which always remains interest-free. The scheme applies to new-build properties up to a maximum value of £200,000 and closes in March 2021.
- There is no Help to Buy scheme in Northern Ireland.
If you’re interested in buying a home under the Help to Buy scheme, start by contacting a Help to Buy agent in the area you want to buy in.
The Government has confirmed that a new Help to Buy scheme will launch in April 2021 when the current scheme closes, and will run for two years.
However, this will be limited to first-time buyers only and price caps will be regional.
Help to Buy London
Help to Buy London is a extension of the Help to Buy Equity Loan. It’s aimed people with a 5% deposit who want to buy in London and Greater London where house prices are typically much higher than the UK average.
To reflect this, Help to Buy London offers an equity loan of up to 40%, compared to 20% in England and Wales and 15% in Scotland.
The loan is interest-free for the first five years and, again, the scheme is only available on qualifying new-build homes.
Help to Buy ISA
You’ll need to hurry if you want to open one of these accounts as applications close on Saturday 30 November 2019. Going to make it? Here’s how the Help to Buy ISA works.
For every £200 you save into the account, the Government will add £50. This is up to a maximum bonus of £3,000 (which would apply to £12,000 of savings).
However, note that the Help to Buy ISA bonus cannot be put towards the initial deposit 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 mortgage you require, and subsequent monthly repayments.
There are other limitations too, such as a £250,000 price cap on property the bonus can be used to buy, rising to £450,000 in London.
A Help to Buy ISA is a cash ISA, and you are only permitted to pay into one cash ISA in each tax year.
However, you will be able to 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 shop around.
Some accounts incorporate an upfront bonus that falls away after an initial ‘honeymoon’ period, which is something to watch when saving over the long term.
Check out our handy Help to Buy ISA pros and cons.
The Lifetime ISA offers a tax-free boost of up to £1,000 a year towards either buying your first home or saving towards retirement.
Savers aged under 40 can open one of these accounts 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.
In April 2018, the bonus switched from being paid annually to being paid monthly.
You can opt to use your Lifetime ISA as a deposit on a property worth up to £450,000 anywhere in the UK, so long as you are a first-time buyer.
You will be able to transfer your Help to Buy ISA balance into your Lifetime ISA without losing the tax-free benefits.
Lifetime ISAs are slightly more complicated than Help to Buy ISAs as they will be available as either cash or stocks and shares. You can find out more with our Lowdown on Lifetime ISAs.
Find out more about Help to Save.
Starter Homes scheme
We’re still waiting for confirmation from the Government as to whether or not the Starter Homes scheme has been officially scrapped.
What we do know is that, having been announced in 2015 with the first completions earmarked for 2018, by November 2019, not a single Starter Home has been built.
If and when Starter Homes become available, they will be limited strictly to first-time buyers aged between 23 and 40 and sold at a minimum discount of 20% of the market price.
Price caps will be set at £250,000, or £450,000 in London.
Howeverm you can still register your interest in Starter Homes here.
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.
You’ll then be given the chance to buy further chunks of the home as and when you can afford it, under what’s known as ‘staircasing’ until you own 100%.
But these chunks will be priced at the home’s current market value as assessed by the respective 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 in London.
The scheme is available on both new-build and resale properties. You can find out more about Shared Ownership with our guide.
Register with a Help to Buy agent in the area you want to buy in.
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’s website.
Maximum discounts available (2019/2020) stand at £82,800 in Englandor £110,500 in London.
These increase at the start of each tax year in line with the CPI measure of inflation.
Find out more about Right to Buy with our Q&A.
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.
However, if you (and any other joint buyer/s) are non-homeowners and have never owned or part-owned a home previously (in any part of the world), the first £300,000 is exempt from stamp duty, up to a maximum value of £500,000.
This means if the home costs £300,000 your stamp duty bill will be zero. If it costs £500,000, your stamp duty bill be be £10,000, opposed to the previous £15,000. The maximum saving available is therefore £5,000.
Read more here