First-Time Buyer Schemes
Help is at hand
A topic constantly hitting the headlines is that many first-time buyers are still struggling to purchase a home. Thanks to the credit crunch, the days of 100% mortgages have pretty much disappeared and lending criteria has become much stricter. This means that in order to get a competitive mortgage deal, buyers need to hand over a fairly hefty deposit. The very best deals require a deposit of at least 40%.
This has priced many first-time buyers out of the market and as a result, some are turning to various schemes that have been set up in order to help first-time buyers get their foot on the first rung of the property ladder.
There are a number of different schemes available to first-time buyers. A government initiative called HomeBuy offers various options depending on how you want to purchase a property. These can be split into two different types of product; one allows homeowners to take out a loan to help with their home purchase and the other involves shared ownership with a housing association (a part buy, part rent arrangement).
The aim of housing associations is to build low cost homes for first-time buyers or for people re-entering the housing market. Traditionally housing associations built affordable rented accommodation, but in recent years their remit has expanded and they are now offering schemes to allow people to get a foot on the house-purchasing ladder.
Originally, the schemes that they offered were aimed at low-income earners, but as property has become increasingly expensive, the mortgage schemes that are now available are attracting a much larger cross section of the population.
The availability of these various schemes differs wherever you are in the UK, so it's worth checking out the HomeBuy website before you start.
Most recently, the government also launched a scheme called NewBuy. This aims to help 100,000 aspiring first-time buyers who have deposits of only 5% of a new-build's value - for example, £10,000 instead of the previous average of £40,000 for a £200,000 property.
HomeBuy qualifying criteria
To qualify for any of the HomeBuy schemes there are strict criteria:
- You must not have your name in the deeds of another property.
- You must not have a household income above £60,000.
- You must show you do not have a poor credit history and can afford the costs involved in buying or renting a home.
- You cannot afford to buy a property that meets your current needs without assistance through a HomeBuy scheme.
In some cases, properties in the scheme are only available for key workers. The following categories are classified as key workers and there needs to be at least one member of the household working in these roles:
- Teachers and nursery nurses, either in schools, sixth form colleges or further education;
- Police officers, community support officers and some civilian staff;
- Prison officers and some other prison staff;
- Probation Service staff;
- Local authority planners;
- Firefighters and certain other staff in Fire and Rescue Services;
- Connexions personal advisors if employed by a local authority or a Connexions partnership;
- Armed Forces personnel, Ministry of Defence clinical staff, Ministry of Defence police officers and uniformed staff in the Fire and Defence Service;
- Qualified environmental health officers/practitioners working in a local authority, government agency, the NHS or other public sector agencies;
- Highways Agency staff in certain safety roles in the traffic officer service;
- Social workers, nursery nurses, educational psychologists and therapists employed by local authorities, the Children and Family Court Advisory Support Service or the NHS;
- All clinical NHS staff, excluding doctors and dentists.
Under this scheme, home buyers will be given a loan to put towards the purchase of a new-build property. Home buyers can receive a mortgage for up to 70% of the property price and the loan will be provided for by the scheme/ housing association to cover the other 30%. For example, if you were buying a house worth £200,000, you would be given a mortgage for £140,000 and a loan for £60,000.
This means you don't necessarily have to have a deposit. However, if you prefer, you can use any savings as a deposit towards your share.
There are no payments on the loan for the first five years - after this, you will be charged a fee of 1.75% and this increases annually in line with inflation.
At a later date, you can buy additional shares until you own 100%. This is calculated on the current market value at the time you buy the extra shares. If you want to sell up, the loan is repaid as a percentage of the property's value when you come to sell.
FirstBuy is a shared equity scheme where the government and a housebuilder provide a loan to cover 20% of the property's value. The buyer then contributes a further deposit of 5%, taking the total deposit to 25%. This means you can access 75% loan-to-value mortgage deals, which are usually more competitive.
Again, you don't pay anything on your loan for five years, but after this there is a fee of 1.75% which increases in line with inflation.
EXAMPLE – FirstBuy
- You buy a property valued at £300,000 - You have a deposit of £15,000 (5%) - You then receive a loan of £60,000 (20%) from the housing association
- You get a mortgage worth £225,000 (75%)
Rent to HomeBuy
This option lets you try before you buy. You can rent a new-build property for a specified period of time but there is an expectation that you will purchase a share in the property at the end of the rental period.
You can buy homes through a range of housing associations on assured shorthold tenancies with an affordable rent of 80% (or less) of market rents. The rent is payable for a set period, after which time there will be an expectation that you will buy the property on the terms of New Build HomeBuy. The rental period provides you with the opportunity to save for a deposit towards buying a share in the home.
If you have lived in housing association or council housing for five or more years then you qualify for this option. This enables you to buy at least 25% of the property and pay rent on the remainder. The landlord will lower the amount of rent you pay and this depends on how much of the property you own. Over a period of time you could then purchase more shares and eventually own the property outright, but bear in mind that this is only available if the landlord is taking part in the scheme.
Costs to watch out for
1. Arrangement fees on your mortgage – you may have to pay both an application fee and a completion fee
2. Stamp duty
3. Service charges if you're buying a flat
4. Legal fees
5. Valuation and survey fees
Shared ownership - New Build
This is basically a part buy, part rent option but only available on newly built properties. Most people buy between a 25% and 75% share in the property although it is possible to take out a mortgage of up to 80%. You will then pay rent on the remaining amount; this will be paid to the housing association or developer. The scheme promotes the idea that you will save more money on the rent and therefore, over a period of time, be able to save up and purchase a higher stake in the property.
For disabled people
Home Ownership for People with Long Term Disabilities (HOLD) is a scheme that offers an option for disabled people to buy any home on a shared ownership basis. There is limited availability as very few housing associations offer this service, plus you can only apply for the HOLD scheme if no other HomeBuy schemes meet your needs.
For the Armed Forces
Armed Forces Home Ownership Scheme (AFHOS) is only available for members of the armed forces. If you have between four to six years of continuous services in the armed forces, the scheme is a way for you to buy a home suited to your needs, with some extra help to top up your mortgage.
It could provide you with a loan of between 15-50% of the value of the home that you choose on the open market, usually through an estate agent.
This is the latest scheme targeting first-time buyers who only have a deposit of 5%. The scheme is for new-build properties only. High street lenders Nationwide, Barclays and NatWest are already offering the mortgages in conjunction with select building firms including, Bovis, Barratt, Persimmon and Taylor Wimpey. Santander will also be offering mortgages through the scheme.
The government and property builders will provide security for the mortgages, so that if a house is sold for less than the outstanding mortgage debt, lenders will not lose out. Developers pay lenders 3.5% of the property price and the government provides an extra guarantee of 5.5%.
Disadvantages to these schemes
Although these schemes sound like an easy way to get onto the property ladder, there are of course disadvantages. There have already been criticisms of the NewBuy scheme, with some pointing out that the main beneficiaries will be developers with their inflated new-build house prices, not first-time buyers. What's more, the mortgages available under this scheme are expensive, particularly given that the guarantee offered to lenders plus the 5% deposit from the buyer comes to 14%. This means lenders should be offering mortgages closer to 85% loan-to-value (LTV), not 95% - if they did, the interest rates would be much lower. Some lenders charge as much as 6% so those buyers who are able to save up for a larger deposit would be better doing this and applying for a more competitive mortgage.
Under the NewBuy scheme, a 95% loan-to-value £200,000 mortgage with an interest rate of 5.99% would mean paying back £1,287 each month.
But if you could save up enough for a 15% deposit (85% LTV) you could get an interest rate of around 3.19%, bringing your monthly mortgage repayments down to £968 – that's £319 less a month, saving you £3,828 over a year.
What's more, selling your house while in a shared ownership scheme can turn into a nightmare. For a start, you can only sell your share of the property to other people in the scheme which reduces the number of possible buyers quite considerably.
You should also bear in mind that property prices can rise and cost you a lot of money if you are planning to buy further shares in your home. After all, if you've bought a 50% share in a property and you're hoping to buy the remaining 50%, should prices rise over the coming years, you'll find the amount you have to stump up will have shot up and that 50% may no longer be achievable.
You but a 50% share of a house worth £200,000 - so you spend £100,000The plan is to buy the remaining £100,000 worth in five years time.
After five years, your house in now valued at £230,000 so you will end up paying an extra £30,000 on top of the £100,000.
Signing up to one of these schemes also won't exclude you from the fees associated with buying a home. For example, you will have to cough up for mortgage fees, legal fees, valuation fees and stamp duty – to name a few. Plus you will have to pay for the cost of moving itself. Therefore these schemes are not necessarily as cost-effective as you might think and you need to consider them carefully.
- Check whether you qualify for any of the schemes first
- Weigh up whether you'd prefer to take out a loan or partly rent your property instead
- Don't forget to factor in all of the additional costs to buying a home
Consider whether you'd be better off saving harder for a deposit – could you get a more competitive mortgage?