Helping hands for first-time buyers
By Ed Towner 22.05.2012
There is a huge variety of schemes to help first-time buyers get onto the property ladder. These government- led initiatives offer discounted mortgages in the hope of kick-starting the housing market.
The big problem facing first-time buyers is saving up enough for a deposit. Thanks to the credit crunch, lenders have tightened their criteria and many of the very best deals now come with high deposits of around 40%. This has made it much harder for first-time buyers to get on the property ladder and the average age of someone buying their first home is now 35 years old.
The government came up with a scheme called HomeBuy a few years ago in an attempt to help first-time buyers finally get on the property ladder. There are two different types of product under the scheme; one involves shared ownership with the housing association (a part buy, part rent arrangement) and the other allows homeowners to take out a loan to help with their home purchase.
But it gets a little more complicated than that because the availability of each scheme differs depending on where you live. So be sure to check out the HomeBuy website before you start.
To qualify for the HomeBuy schemes, you'll also need to meet certain 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 don't 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.
HomeBuy Direct/New-build HomeBuy
Under this scheme, a housing association will give you a loan of up to 30% to put towards the cost of a new-build property. You will then receive a mortgage for the remaining 70% of the property price.
You buy a house for £150,000
You receive a loan of £45,000 (30%)
You receive a mortgage for £105,000 (70%)
As a result, it's not strictly necessary for you to have a deposit. You won't have to make any payments on your loan for the first five years, but after that, you'll be charged a fee of 1.75% and this will increase annually in line with inflation.
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 very similar but in this case you buy at least 80% of the property and you will receive a loan of up to 20%. You'll also need a deposit of at least 5% for your mortgage. Again, you don't pay anything on your loan for five years but after this, you'll need to pay a fee of 1.75% which also increases in line with inflation.
You buy a house valued at £200,000
You have a deposit of £10,000 (5%)
You receive a loan of £40,000 (20%) from the housing association
You get a mortgage for £150,000 (75%)
Rent to HomeBuy
This option essentially lets you try before you buy. Tenants can rent for a specified period of time on the expectation they will then buy a share of the property. Homes are available through a range of housing associations and will often come under different names such as "Try before you buy" or "Rent save buy" and so on. Once the rental period ends, you'll be assessed to see whether you can afford to buy a share in the property. If you can't afford to, your landlord may review your tenancy, but if not, you'll have to find a new home to move to.
This option is only open to those who want to buy their housing association or council home, providing they have lived in it for five years. It enables you to buy a share of your home – at least 25% initially - and pay rent on the remaining share. The landlord will charge a lower rate of rent as technically you're only renting 75% of the property. At a later date you can buy additional shares in the property until you own it outright. Bear in mind you can only take up this option if your landlord is taking part in the scheme.
Shared ownership New Build
An easy way look at this option is part buy, part rent. It's only available on brand new homes and to start with, you buy a share of the property - most people buy between 25% and 75%, although recently there have been options up to 80% (you can take out a mortgage to do this). You will then pay rent on the remaining share which is owned by the housing association or developer. The idea behind this scheme is that as you save more money on the rent you can then use that to buy an increased stake in the house and at some point fully own the property. That said, recent research by some of the UK's housing associations has shown that around only one in four shared owners actually achieve 100% ownership. If you decide to sell up, you share will be marketed for sale by your housing association.
Staircasing: As you only own a portion of the property you may want to increase your stake. Over a period of time, tenants buy an increased share in the house; this is known as 'staircasing'.
Disadvantages to HomeBuy schemes
HomeBuy schemes sound like a great way to get into the property market but there are downsides. Selling your house while in shared ownership can turn into an absolute 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.
The UK might be in a housing slump but bear in mind that property prices can rise and cost you a lot of money. 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 buy a 50% share of a house worth £200,000 – so you buy £100,000
You plan to buy the remaining £100,000 in five years
But after that five years, your house is now valued at £230,000 so you now have to find an extra £30,000 to pay £130,000
What's more, as the housing association part-owns your property you will need permission for any home improvements, remortgage arrangements, just about anything! The scheme does not exempt you from any legal fees, stamp duty or mortgage fees so don't forget to factor these into the equation. Mortgage fees can vary from £500 to £2,000 so always take this into account when you're taking out a mortgage.
If you can afford to, saving hard to put down a deposit and getting your own property is a safer option or you could even consider buying with friends or relatives.
The government has recently launched a scheme called NewBuy which aims to help 100,000 first-time buyers who only have deposits of 5% - for example, £10,000 instead of the previous average of £40,000 for a £200,000 property. Under the scheme, developers pay the lender 3.5% of the property price and the government provides an extra guarantee of 5.5%.
However, this scheme has its own disadvantages. For a start, the mortgages on offer to first-time buyers under the scheme are expensive. For example, some 95% loan-to-value mortgages being offered have rates as high as 5.99% - this would mean a monthly cost of £1,287 on a £200,000 mortgage. There are also concerns that housebuilders will inflate house prices so that they, rather than first-time buyers, benefit from the scheme.
- If you're a first-time buyer, HomeBuy could help you to get onto the property ladder
- Always compare options carefully as there are several different versions of the scheme
- Consider whether you're better off saving for a deposit yourself
Schemes can vary depending where you live so be sure to check out your options carefully
Top tips For using a property scheme
Be aware there are strict criteria so check you qualify before considering HomeBuy schemes
Consider what would happen if you were to sell up – what would you get back?
Increasing your share
If you want to buy a greater share in your property later on, think about whether house prices are likely to rise and how much this would cost you
Watch out for fees
Don't forget about mortgage fees, stamp duty, legal fees, surveys and so on