Government schemes to help boost the housing market
First-time buyers are, it is often said, the lifeblood of the mortgage market. It’s no surprise then that, without them, the housing industry in the UK almost flatlined.
The government is attempting the kiss of life with a selection of schemes aimed at getting first-timers on to that first rung of the property ladder, but what are they and do they work?
THE FIRST BUY SCHEME
This scheme is open to those wanting to buy a new-build property with a household income of less than £60,000 a year. If you fit the bill you will receive an equity loan of up to 20% of the value of the property from the government and the housebuilder, providing you have a 5% deposit.
The loan is interest-free for the first five years then there’s a 1.75% annual fee. This will rise by inflation plus 1% each year. When you sell the house, or once you’ve lived there for 25 years, you’ll have to repay 20% of the value of your home to the government and housebuilder.
The good thing about this scheme is that “buyers gain access to a much wider choice of mortgages at better rates than if they were borrowing, say, 95% loan to value,” says Mark Harris, chief executive of broker SPF Private Clients.
However, it is only available on new builds and you could end up paying back far more than you borrowed if house prices soar.
With shared ownership, first-time buyers can buy a share of a property – usually 25%, 50% or 75%. The remaining share is owned by a housing association and the buyer pays rent on this. Over time, the buyer can increase their share until they own the property outright.
The good thing about shared ownership is it enables you to slowly build up ownership of your home.
The drawback is the choice of properties can be limited as it is only “available on particular housing association properties and specific eligibility requirements may apply”, says David Hollingworth, mortgage specialist at broker London & Country.
Through NewBuy, the government and the property developer underwrite a mortgage in order to reduce risk to the lender. Developers pay the lender 3.5% of the property price, while the government provides a guarantee of 5.5%. You can then provide a deposit of as little as 5%.
Unlike the other two schemes, this allows you to buy a house outright rather than only buy part of it. The only restrictions are that it has to be a newbuild property worth less than £500,000. This is also the only one of the schemes that isn’t restricted to first-time buyers.
However, there is some concern over the rates on offer. Despite initially launching products at reasonable rates (averaging 4.29%) the lenders involved in the scheme have now hiked up their rates with a two-year fixed, now averaging 4.79%, and a three-year fixed hovering around the 6% mark.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).