With interest rates rising and Help to Buy set to end in under 12 months, what options are there for first time buyers looking to get onto the property ladder?
First time buyers have just a few months left before the government’s Help to Buy equity loan scheme (which helps those with a 5% deposit fund the purchase of a new-build home) draws to a close on 31 March 2023.
The wind down comes at a volatile time within the mortgage market, with interest rates on the rise. Though daunting, if you’re a first time buyer there are still a number of alternative schemes and tips that will help you secure a new home. Nathan Bakhbakhi explains the options.
Some lenders offer preferential rates specifically to first time buyers, which is positive news in today’s market. In many cases these rates are only around 0.03% or 0.04% lower than the comparable interest rates available to home movers, but this could still make a difference over the longer term.
Where possible first time buyers should not fixate too much on the interest rate and also consider the monthly affordability of the mortgage. Remember that extending the terms of your loan (eg. 25 or 30+ years) is another way to reduce your monthly repayments.
- Mortgage Guarantee Scheme
Mortgage Guarantee is a government-backed initiative that helps first time buyers, home movers and previous homeowners buy a home worth £600,000 or less with a 5% deposit. Under the scheme, the government shoulders some of the cost if the lender loses any money, which has encouraged a number of them to offer 95% mortgages.
Some big high street lenders are taking part in the scheme such as Halifax, Barclays and HSBC but their terms may differ, so this is worth bearing in mind. Some, for example, set the property value cap lower than £600,000, which would be a consideration for those looking to buy in London. Mortgage Guarantee does not apply to new-build homes and it closes at the end of December 2022.
Shared Ownership allows you to buy a percentage of the value of the home and pay rent on the rest. The percentage is set depending on what you can afford and ranges largely between 25% to 75%, with buyers able to purchase more equity in the property in stages, which is known as ‘staircasing’. Although, be wary that each time you staircase you will have to pay fees.
There is no cap on the value of the property (which must be a new-build or existing shared ownership home), but your household income must be £80,000 or less (£90,000 in London). Buyers should pay close attention to the rental costs, which can be significant – particularly in London.
Deposit Unlock enables first time buyers and second steppers to buy a new-build property worth up to £750,000, with a deposit of 5%. It was developed by the Home Builders Federation (the HBF, which represents housing developers), its members and reinsurance broker Gallagher Re.
The idea behind it is to make new-build properties more attractive to lenders. It does this by encouraging housebuilders, rather than the lenders, to pay the cost of insuring the mortgage through a percentage of income made from their house sales. Deposit Unlock was originally available via a small number of housebuilders and lenders, but it’s growing in popularity with an additional 50 housebuilders recently signed up to the initiative.
- Bank of mum and dad via a Lifetime Mortgage
First time buyers may be able to use some of the equity in their parents’ property to help fund the purchase of a new home. In this scenario, your parents could release equity from their property via a Lifetime Mortgage.
The amount your parents can borrow is based on their age and the value of their property. A lifetime mortgage has no fixed term and borrowers have the ability to let the interest roll up on top of the loan, resulting in no monthly payments. As this is a form of equity release, it is important to get specialist advice from specialist equity release advisors. We have a dedicated team at Knight Frank Finance who can help with this.
Green mortgages offer favourable terms for those buying an eco-friendly home (typically with an EPC level of band ‘C’ or above). This could be a great way to secure a better deal on a new-build property, which are usually built with higher energy efficiency specifications, meaning they would qualify as a green home. You can read more about those options here (link to previous green mortgages piece).
The First Homes scheme offers discounts of up to 50% (although more usually 30%) on new-build properties worth no more than £250,000, (or £420,000 in London) after the discount has been applied. This scheme is for first-time buyers only, with a household income of £80,000 or less (£90,000 in London) and who have a connection to the area in which they hope to buy.
If you’re a first time buyer and would like to find out more about securing a mortgage, please speak to us; we can identify the best financial approach for your circumstances.