Mortgage help for first time buyers – government schemes and other ideas

Published by Hannah Nemeth on 03 March 2016.
Last updated on 01 June 2017

Struggling to finance your first home? Read our guide to government schemes – and family-friendly products – to help get you moving

With first homes typically costing £218,000 in the UK and a whopping £490,000 in London, it’s tough out there for anyone aspiring to homeownership.

Over the past decade, spiralling house prices have meant it’s a struggle to save up for a deposit. According to the latest research from Halifax, first-time buyers typically paid a deposit of £32,321 in 2016 – up from £15,168 in 2006. In London, deposits have almost quadrupled in 10 years – from £26,701 to £100,445.

First-time buyers are also taking out mortgages for longer. In 2016, 28% of all first-time buyers with a mortgage chose a 30- to 35-year term – up from just 11% in 2006. Overall, some 60% of first-time buyers choose mortgage terms of 25-plus years to improve affordability.

But it’s not all bad news. More lenders are offering mortgages with little or no deposit and there is a variety of government schemes on offer. According to Bank of England data, the share of first-time buyers receiving new mortgage advances hit 22% towards the end of 2016 – its highest level since 2007.

Government schemes

Lifetime Isas and Help to Buy Isas

Until recently, a Help to Buy Isa, or H2B Isa, was the most tax-efficient way to save for a deposit for a first home. But now savers also have the choice of a Lifetime Isa (Lisa), and can move their existing H2B Isa to a Lisa.

The government offers a generous bonus of up to £1,000 a year with a Lisa – as compared to a total bonus of £3,000 with an H2B Isa. Given that the average deposit in the UK is £32,321, a first-time buyer saving £4,000 a year could have saved enough in six and a half years.

However, the Lisa is unlikely to be readily available. At the end of March, just one cash provider had committed to offering a Lisa – and this was from June – and just two major stocks and shares providers said they would offer one from its launch date on 6 April.
The Lisa also has a sting in the tail when it comes to exit fees, which H2B Isa savers don’t face.

Tom Selby, a senior analyst at AJ Bell, explains. “If someone contributes the maximum £4,000 over 10 years [into an investment Lisa], they will have invested £40,000 in total. This will have been topped up with £10,000 of government bonuses to give a total investment of £50,000,” he explains.

“If this grows at 5% a year, after charges the fund will be worth £65,956. If the investor takes that money out before age 60, is in good health and does not use it to purchase a house, the 25% exit charge would be a whacking £16,489.”

See the table below for more on how these two types of Isas differ.

Help to Buy equity loan

With a Help to Buy equity loan, the government will lend first-time buyers and home movers up to 20% (40% in London) of the cost of a new-build home worth up to £600,000 in England. You’ll need a minimum cash deposit of 5% and a 75% mortgage, and you won’t be charged interest on the loan for five years.

Help to Buy Wales runs a similar shared equity loan scheme for new-build homes, up to £300,000.

Scottish buyers can apply to the Help to Buy (Scotland) Affordable New Build and Help to Buy (Scotland) Smaller Developers Scheme for homes up to £200,000 for properties bought on or before 31 March 2018 and £175,000 for properties bought on or before March 2019. The Scottish government will take an equity stake of up to 15% of the value of the property.
Scotland’s Open Market Shared Equity scheme helps people buy a home on the open market with price limits depending on the area, while its New Supply Shared Equity scheme helps with purchases of new-build homes.

There is currently no equity loan scheme in Northern Ireland.

Visit Helptobuy.gov.ukHelptobuywales.co.uk or https://beta.gov.scot/policies/homebuying for further details.

Shared ownership

Shared ownership offers you the chance to buy a stake in a property owned by a housing association or private developer in England. You will need to be eligible for a mortgage on your share of the property, which is generally 25% to 75% of its value, and pay a discounted rent on the remaining share. To be eligible, your household earnings must not exceed £80,000 a year (£90,000 in London).

You can gradually increase your ownership by buying shares from the housing association, known as ‘staircasing’, but if property prices rise your new share will cost more.

If you are aged 55 or over, you can buy a share of up to 75% with the Older People’s Share Ownership scheme in England, at which point you will pay no rent.

In Northern Ireland, a Co-Ownership scheme enables buyers to purchase between 50% and 90% of a property and pay rent on the remainder. The maximum value of the property you can buy is £160,000.

There are no government-run shared ownership schemes in Wales and Scotland.
Visit Helptobuy.gov.uk/shared ownership or Co-ownership.org.

Right to buy

The government’s Right to Buy scheme offers a generous discount of up to £77,900 (£103,900 in London) to council tenants in England who want to buy their council house and have lived in social housing for at least three years.

However, Right to Buy is no longer available in Scotland, and Wales – which has a maximum discount of £8,000 currently – is planning to scrap the scheme.

In Northern Ireland, the maximum discount is £24,000 for tenants who have lived in their council home for more than five years.

Visit Righttobuy.communities.gov.uk or Housingadviceni.org/right-buy.

Social HomeBuy

If you don’t have enough money to buy outright but have lived for more than five years in a housing association or local authority property in England only, you may be able to buy a minimum 25% share of your home through Social HomeBuy.

You could receive a maximum discount of between £9,000 and £16,000, depending on the share you buy and the property’s location, and the landlord will reduce your rent accordingly. Contact your local council to see if it runs the scheme.

Starter Home

If you’re aged between 23 and 40, a first-time buyer, and have a maximum household income of £80,000 (£90,000 in London), the government’s Starter Home scheme will allow you to buy a new-build home with at least 20% off the market price.

The discounted price must be less than £250,000 nationwide and £450,000 in London. The first starter homes are not expected to be available until 2018. To register your interest, visit Starter-home.co.uk.

Help from mum and dad

More than a third of first-time buyers in England need a family gift or loan to help them buy their home compared to 20% seven years ago. A further one in 10 relies on inherited wealth, according to a recent study by the Social Mobility Commission.

The report also revealed that first-time buyers who receive money or a loan from their parents could buy 2.6 years earlier in the UK and 4.6 years earlier in London than those who don’t have parental support.

Guarantor mortgages

This type of mortgage, where a parent’s income is taken into account, is fairly niche now. Lenders, including Hinckley & Rugby building society, Market Harborough and Virgin Money offer guarantor mortgages, for example, if the applicant’s earnings are likely to grow in the future – as would be the case with a trainee lawyer or doctor.

‘Family’ mortgages

Another option is a mortgage where parents or close relatives can offset some of their savings as a security for the deposit or offer collateral from their own property, which helps cut the amount of deposit needed.

Barclays Family Springboard mortgage allows anyone to help you with a mortgage of up to £500,000 on a property in the UK (except for new-builds) if they lock away 10% of the purchase price in cash. Keep up the repayments, and ‘helpers’ get their savings back after three years with interest (currently 1.76%). Helpers are named on the mortgage but not on the property title, so they won’t pay stamp duty.

Similarly, the Family Building Society offers a Family Mortgage and Family Offset mortgage. However, the total secured on the property can only be 75% loan-to-value (LTV), so a buyer with a 5% deposit will need their family to lock away the remaining 20%.

Recognising the fact that buyers may need to let out a room to help those with a limited deposit, some lenders now allow this.

Bath Building Society’s Parental Assistance mortgage will take into account the applicant’s income (which must be over £20,000), some security from a parent’s property and the potential rent from one tenant.

Market Harborough’s Family Assisted 100% LTV mortgage works in a similar way, with consent for rental income from up to two rooms.

If you’re off to university, both Loughborough and Bath building societies offer Buy for Uni mortgages that factor in potential income from letting out rooms, as well as security from parents or close relatives.

Joint mortgages

Another way in which parents can help is to take out a joint mortgage with their children, owning a share of the property.

David Hollingworth, associate director at London & Country Mortgages, explains: “More lenders have shifted away from traditional guarantor mortgages, but would allow parents to go joint on the mortgage. That will achieve the higher borrowing amount, but could result in a capital gains liability, as the parent would typically have to be joint on the ownership of the property. That could also result in the stamp duty surcharge on additional properties of 3% applying.

“Some lenders, including Barclays and Metro Bank, will allow the parent to be joint on the mortgage but the title to be only in the child’s name, which sidesteps that issue,” he adds.
However, if lenders require that parents are named on the property deeds, John Bunker, tax solicitor at Irwin Mitchell, advises thinking twice before going ahead.

He says: “Where a property is bought jointly by two or more people, if any one of those people has any interest in a second property the 3% extra stamp duty will be payable.

“It doesn’t matter how large or small the interests of the two or more people are, so long as the value is at least £40,000,” he adds. “For example, this means a parent (who already owns their own home) could take, say, a 10% share of a child’s new home (worth £400,000-plus) and that would be subject to the extra 3% charge.

“We therefore recommend that parents consider giving loans to children, rather than taking a share of the equity, which can still be protected on the registered title,”
he adds.

Go it alone

If you need a mortgage without parental help, plenty of lenders offer products with a 95% LTV.

Mr Hollingworth says: “Although the very cheapest rates are on offer to those with large deposits, a more competitive mortgage market has seen things develop for first-time buyers with more limited resources. The market for 95% mortgages has remained solid and rates are better than they were. A two-year fix at 95% LTV can be found for as little as 2.99% from Nottingham Building Society with a £999 fee (we’ve highlighted Hinckley & Rugby in the table below as it has a lower fee and no early repayment charge).

“Although high LTV rates are more widely available now than they were, borrowers will still fare better if they put down a bigger deposit. For example, stretching to a 10% deposit could potentially cut 1% or more off the interest rate.

“Like any borrower, it is important for first-time buyers to consider fees as the lowest rates can come with bigger fees – for example, First Direct offers a two-year fix to 90% LTV at 1.89%, but carries a £1,450 fee.

There’s a good range of options now, and some will offer other incentives for first-time buyers, so it could pay to look at overall value rather than focus too heavily on rate.”

Lifetime Isa versus Help to Buy Isa

Details Lifetime Isa Help to buy Isa
What’s the maximum you can save each year? Up to £4,000 a year £1,000 initial deposit and then up to £200 a month (£3,400 in year one and then £2,400)
Who can open it? Anyone aged between 18 and 39 18-plus and a first-time buyer
Can you pay in lump sums? Yes No. Must be regular monthly payments
What’s the maximum bonus? £32,000 after 32 years £3,000 if you save the maximum allowed of £12,000
What’s the maximum you can spend on a property? £450,000 £250,000 (£450,000 in London)
When can you use it? After it’s been open for a year Once you’ve saved at least £1,600
Is it cash only? No. You can save cash or invest in stocks and shares Yes
How is the bonus paid? After the first year for April 2017/2018 Lisas. Monthly from April 2018 When you’ve completed the purchase of your first home
Are there any exit penalties? Yes. You won’t get the bonus and there is an exit penalty of 25%* No. You can withdraw the money and keep the interest accrued, but you won’t get the bonus

Note: *The exit penalty has been waived until April 2018. If you don’t purchase a house, you can leave the money in the Lisa until aged 60 and then access it tax-free.

First-time buyer mortgage deals

Lender Deposit needed Initial rate Scheme details Lender fee ERCs (i) apply Notes
Barclays 0% 2.99% Fixed to 31 May 2020 0 Yes 10% charge on parental savings for three years. Free valuation(ii).
Skipton 5% 2.05% Fixed to 30 June 2019 0 Yes Help to Buy 20% equity loan. Free valuation and £500 cashback
Leek United 5% 2.29% Fixed to 31 August 2022 £995 Yes Help to Buy 20% equity loan. Refunded valuation and £250 cashback
Hinckley & Rugby 5% 3.29% Fixed for two years £199 No N/A
Coventry 10% 2.19% Variable term £999 No Free valuation
Post Office 10% 2.32% Fixed to 30 April 2019 0 Yes Free valuation
West Brom 10% 2.99% Fixed to 30 June 2022 0 Yes Free valuation and £1,000 cashback

Note: (i) Early repayment charges. (ii) The mortgage valuation is a limited inspection and you should not rely on it when deciding whether to buy a property.

Source:  L&C (Landc.co.uk), 28 March 2017.

“Our monthly outgoings are less than we paid in rent”

Morgan Trowland, 32, and Kim Sparks, 33, have bought their two-bedroom apartment at Peabody’s Merchants Walk scheme (Merchantswalk.co.uk), close to Bromley-by-Bow in east London.

Originally from New Zealand, the couple moved to London four years ago, renting a flat in north London.

Morgan, a civil engineer, says: “We found that property prices were increasing at a higher rate than we could save and we wanted to stop wasting money on rent, so it made sense to buy soon. Our monthly outgoings are now less than what we were paying in rent and are going towards something that is ours, which is a huge bonus.”

The couple secured their £375,000 apartment through a London Help to Buy equity loan with a deposit of £18,750 (5%).

“After years of renting, it feels like home”

Solicitor Xavier Langlois, 30, and producer Tim Ellis, 28, recently moved into their one-bedroom apartment at Charters Wharf (Charterswharf.co.uk), Family Mosaic’s new waterside development in Greenwich.

“With the transport links from Greenwich, it’s easy to get in and out of London. We’ve started exploring the area with its independent shops and cafés,” says Xavier (pictured above, left).

“We’d been renting in Soho for a long time and the most notable change is coming back and feeling like we’re actually returning to our own home.”

The couple took out a 90% LTV mortgage on the property, which cost £440,000, without help from government schemes.

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