Mortgage help for first time buyers – government schemes and other ideas
First-time buyers could be forgiven for being confused when it comes to deciding whether spring 2016 is a good time to climb on to the property ladder.
Ever since George Osborne announced in his Autumn Statement that there would be a 3% price hike in stamp duty for landlords and second-home owners, property pundits have been predicting that this will cool the buy-to-let market and help first-time buyers.
Dan Gandesha, chief executive of crowdfunding platform Property Partner, says: “There’s currently a mini-surge in activity as buy-to-let investors scramble to beat the 3% stamp duty deadline in April.
“But the game’s about to change. Landlords are facing a double-whammy – the stamp duty hike, and, if they’re borrowing money, tougher lending criteria. My prediction is that buy to let as a cottage industry is on the way out. By contrast, first-time buyers, helped by a raft of government initiatives, will be in the driving seat.”
On the other hand, buyers are struggling to raise enough money for the deposit for their first home. According to the annual Halifax First-Time Buyer Review, published in January, the average deposit paid by first- time buyers increased by 13% in 2015 to £32,927, and more than a quarter of first-time buyers are signing up for 35-year mortgages.
So where does this leave you if you don’t want to be part of Generation Rent? Here’s our guide to the help on offer for would-be homeowners.
Help to buy
The government’s umbrella term for helping people get on to the property ladder, Help to Buy covers equity loans, mortgage guarantees and individual savings accounts (Isas). You can see Moneywise's gude to which Help to Buy Isa you should get here.
With a Help to Buy equity loan, the government will lend you up to 20% of the cost of a new-build home worth up to £600,000 in England. You only need a 5% cash deposit and a 75% mortgage to buy your home and you won’t be charged interest on the loan until you have owned your home for five years.
After that, you will pay a fee of 1.75% a year, rising annually by any increase in the Retail Prices Index plus 1%.
As property prices are much higher in London, the government recently increased the upper limit for the equity loan for buyers of new-build homes within Greater London to 40%. In this scenario, you’ll need to have a deposit of at least 5% and a mortgage of up to 55% to cover the full house price.
When you sell your home or want to pay off some of the loan, you will have to repay at its current market value.
If you don’t want to share the equity in your home and have a deposit of at least 5%, you could apply for a Help to Buy mortgage guarantee. This is available nationwide on new-build and existing homes costing up to £600,000.
The government offers lenders the chance to buy a guarantee on the mortgage loan, which means participating lenders can offer buyers a loan of between 80% and 95%. You will be responsible for mortgage payments for the full amount of the loan.
For a full list of lenders, visit Gov.uk/affordable-home- ownership-schemes/help-to-buy-mortgage-guarantees.
For details of schemes in Wales, Scotland or Northern Ireland, visit Helptobuywales.co.uk, Gov.scot, or Nihe.gov.uk.
If you’re saving up for a deposit for your first home, opening a Help to Buy Isa is a no-brainer. For every £200 you save, the government will pay a bonus of £50 – but you have to save at least £1,600 to claim it. Save the maximum of £12,000, and you’ll get a £3,000 bonus. These Isas are opened individually, so couples buying jointly could receive a bonus of up to £6,000.
Your Isa goes towards the deposit on your first home in the UK, which must be worth no more than £250,000, or £450,000 in London. You will need to take out a mortgage and can’t rent it out afterwards.
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. You will need to have lived in social housing for at least three years and, depending how long you have been a tenant, you could be entitled to up to 70% off the value of your home.
Right to Buy has recently been extended to housing association tenants, too, as part of a pilot run by five housing associations ahead of a national roll-out later this year.
In Wales, tenants can only claim a maximum right-to-buy discount of £8,000, while in Northern Ireland it is £24,000. Unfortunately, council and housing association tenants in Scotland only have until 31 July 2016 to exercise their right to buy, as the scheme is being discontinued. Until then, tenants who rented their homes after 30 September 2002 will receive a maximum discount of £15,000.
Visit Righttobuy.communities.gov.uk for further information about the scheme.
Another way to own your first home is through a shared ownership scheme. Housing associations in England can offer you the chance to buy a share of a property, which can range from 25% to 75% of its value, and then you pay rent on the remaining share.
However, there are strict criteria as to who can qualify for this type of scheme. Your household earnings must not be more than £60,000 a year (or £71,000 in London) for a one- or two-bedroom property, or £85,000 a year or less in London for a property with three or more bedrooms.
From April 2016, the household earnings cap will rise to £80,000 outside London and £90,000 in the capital, regardless of the number of bedrooms. Also, whereas there are currently restrictions on which professions can apply for shared ownership, from April it will be open to anyone.
You can gradually increase your ownership by buying shares from the housing association, which is known as ‘staircasing’, but if property prices rise, your new share will cost more. When you sell up, the housing association has first refusal on buying the property and retains this right for 21 years after you fully own your home.
Help from mum and dad
Most parents would help their kids buy their first home – especially if they don’t have to dip into their own savings.
With this type of mortgage, parents guarantee to repay the debt if you default on the loan. For example, with Aldermore’s Family Guarantee Mortgage, a parent, grandparent or stepparent can provide a 10-year guarantee on a mortgage of up to 100%.
However, the loan is secured against the guarantor’s home. Guarantors must be under 60 and in full-time work at the start of the mortgage. This mortgage comes with Aldermore’s two- or three-year fixed-rate products, with initial interest rates of 5.48% and 5.68% respectively.
Scottish Building Society also offers a guarantor mortgage for first-time buyers of up to 90% loan to value (LTV), up to a maximum purchase price of £300,000. Guarantors can be up to age 70, but must show that they can sustain an income for the term of the loan.
Alternatively, Bath Building Society’s Parental Assistance Mortgage scheme can be set up with an LTV of 95% or 100%. For a 100% LTV, the charge over the guarantor’s property can be no more than 25% of the purchase price of the first-time buyer’s home. The buyer(s) must have a minimum income of £25,000 or £40,000 joint income (one party must earn at least £25,000), and have been employed for 12 months or self- employed for three years.
Family offset mortgage
With an offset mortgage, your parents’ savings can be offset against the deposit on your property. Barclays Family Springboard mortgage allows anyone to help you with a mortgage of up to £500,000 on a property in the UK, with a 5% deposit. You pay a fixed rate of interest for three years (currently 2.89%) and when that ends, you move to a LifeTime Tracker mortgage (3.99% at present).
‘Helpers’ open a Barclays Helpful Start account with 10% of the purchase price when you apply for the mortgage. They get their savings back after three years with interest (currently 1.5%), as long as they keep up the repayments. Helpers are named on the mortgage but not on the property title, so they won’t pay stamp duty.
Another way in which parents can help is to take out a joint mortgage. For example, with Market Harborough’s Family Shared mortgage, parents’ incomes are also used to assess affordability. The term of the mortgage must be completed by the eldest mortgagee’s 85th birthday.
However, there will be a knock-on effect after 1 April when the additional 3% stamp duty on second homes comes into effect. If parents are already homeowners, their share of the second property will be subject to this extra tax.
John Bunker, tax solicitor at Thomas Eggar LLP, advises parents to think carefully about this. 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,” he adds. “For example, this means a parent (who already owns their own home) could take a small 5% share of a child’s new home 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.
“The problem will be if mortgage lenders do not accept a guarantee by the parents, and want them to join in as co-mortgagees/co-owners. There are also some cases where a loan is not the answer for personal rather than tax reasons.”
Tenants in common or join tenants?
If you are buying jointly with parents, or a friend, you can either own the property as joint tenants or tenants in common. Mr Bunker explains the difference: “If parents buy a property in joint names with their child, it’s normally best for it to be owned as tenants in common. This means they each have a specific share, which will go to their estate in the event of their death. Parents can then gift either to the child, or have this taken into account with the rest of their estate or leave it in a family trust.
“Owning as joint tenants works best for spouses who simply want the whole property to pass to the other, if they die, with no trust needed or anyone else having any interest in the home.
“Different interests can be dealt with by a declaration of trust, setting out each person’s rights, which can be protected by a restriction on the registered title at the Land Registry.”
Buying a first home without any help
There are plenty of lenders offering fixed- or variable-rate mortgages with a 95% LTV without an equity loan or parental help.
David Hollingworth, associate director at London & Country Mortgages, has picked out a few of the best offers. He says: “HSBC has a two-year fixed rate at 3.69% to 95% LTV with no fee and free valuation. This deal is backed by the Help to Buy guarantee.
“Alternatively, there are some slightly lower rates but they have bigger fees – for example, Chelsea Building Society offers a two-year fix at 3.64%, but it has a £1,675 fee, so HSBC works out cheaper. Tesco Bank offers a five-year fixed rate at 4.49% to 95% LTV with a £195 fee.
“On the variable rate front, Leeds Building Society offers a two-year discount of 2.59% below the standard variable rate, which is currently 3.10% to 95% LTV, with a £199 fee and free valuation. Meanwhile, Santander offers a two-year tracker rate at 3.49% above the base rate, giving a rate of 3.99% to 95% LTV –with no fee and a free valuation.”
•Rates and fees quoted on 1 February 2016.
Case study: “I’ll gradually increase my share”
Matthew Francis, 27, bought a 40% share in a one-bedroom flat in Peabody’s Prospect Quarter scheme, in Catford, south-east London, in August 2015.
Prospect Quarter, which forms part of the regeneration of the former Catford Stadium, is a two-minute walk from Catford and Catford Bridge stations, where there are regular train services into central London.
Having previously lived in Catford with his parents, the 27-year-old analyst programmer, who works in Holborn, wanted more independence and space for himself and his six-year-old daughter, Breanna.
“The apartment layout is very spacious, so it’s ideal for us. It’s also near a leisure centre where we go swimming, and there’s a park nearby with lots of green space that we can enjoy at the weekend,” he says.
“There is no way I would have been able to afford a property on the open market in Catford,” he adds. “I now have a financial plan and can gradually increase my share of the property.”
Matthew bought 40% of the apartment – which had a full market price of £210,000 - with a deposit of around £14,000. He is already saving to ‘staircase’ to 100% ownership.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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%.