Getting Your Foot On The Property Ladder – A Guide To Mortgages For First-Time Buyers
Chapter Seven
Story Highlights:
This chapter looks at the possible help which is available from the government if you wish to buy a house with explanations of:
- Help To Buy equity loans
- Help to Buy ISAs
- Life-time ISAs
- The Starter Homes scheme
What can Help to Buy schemes offer you?
There are a number of schemes run by the government which you can use to help you get a foot on the property ladder. In this chapter, we’ll consider the following schemes individually: Help to Buy equity loans, Help to Buy ISAs and Life-time ISAs analysing who’s eligible, how much financial assistance you’re entitled to, how to apply and what the advantages and disadvantages of each scheme are.
Have you heard of the Starter Homes scheme? We’ve included the most up-to-date information about this new government initiative so you can judge whether it’s the right scheme for you as a first-time buyer to purchase a new-build.
What is a Help to Buy equity loan?
An equity loan is a low-interest loan which can be used as a deposit towards a home purchase. Although this scheme was due to stop in 2016, it has since been extended to 2020.
Who’s eligible for Help to Buy equity loans?
There are a number of regulations regarding the property you wish to buy. It must be a new-build with a purchase price of up to £600,000 in England, be the only one you own and mustn’t be sub-let or rented out after you buy it. In Wales, the limit for the price of the property is £300,000 and it must be one you couldn’t have otherwise afforded. In Scotland, the amount of help you’d receive would depend on when your application was completed and the value of the property.
Help to Buy equity loans aren’t only for first-time buyers but can also be used by buyers who already own property.
This scheme isn’t only for first-time buyers but can also be used by buyers who already own property but wish to move up the property ladder by purchasing more expensive real estate.
How to apply for Help to Buy equity loans
In England you must buy the property through a registered Help to Buy Builder; your local Help to Buy agent should have a list of builders in your area who are a part of this scheme. This agent is appointed by the government’s Homes & Communities Agency. In Wales, however, you would need to contact your local Housing Association.
How much are equity loans?
In order to take advantage of the Help to Buy equity loan, you should have saved a 5% deposit. The government will lend up to 20% of the purchase price in England. The remaining 75% should be financed by a mortgage.
What are London Help to Buy equity Loans?
To reflect the higher prices of property in the London area, from February 2016 the rules for the limits for equity loans were increased. If you intend to purchase a new-build within the capital, you’ll be eligible for a loan of up to 40% with the remaining 55% being financed by a mortgage. Apart from this difference in the size of the loan, all the other rules for Help to Buy equity loans apply to all loans wherever they are.
Questions on the help to buy scheme
The help to buy scheme is a program run by the UK government to assist individuals in starting off onto the property ladder, even if they do not have a large deposit set aside. In England, the scheme provides individuals who qualify for the scheme with an equity loan that can be put towards buying a new build home that is worth up to £600,000. This particular type of loan is interest free for five years.
In order to qualify for the government help to buy scheme for new builds, including the help to buy equity loan scheme and share ownership program, as well as the help to buy ISA, you must meet the following criteria. You must be aged 16 or over and be a UK resident, have a valid National Insurance number, and crucially be a first time buyer and not own a property in the UK or abroad.
There are some mortgage lenders in the UK market that are in a position to offer help to buy equity loan mortgages to borrowers with a bad credit history and low credit score. Even in the case of missed mortgage payments in the credit history of the borrowers, mortgage application may be accepted by some lenders.
What fees are there for Help to Buy equity loans?
The fees for equity loans are waived for the first 5 years, which gives you a chance to cope with mortgage repayments and increase your equity in the property. From the 6th year, however, you’ll be charged interest of 1.75% on the value of the loan and this will increase every year in accordance with the RPI (Retail Price Index) plus 1%.
Your agent will contact you to set up these monthly repayments and you’ll receive a statement every year. However, the money you’re paying is interest on the loan so the capital is still owed.
Summary:
Help to Buy equity loans are low-interest loans offered by the government to buy new-builds and are available for first-time buyers and previous property owners.
In England, property is bought through a Help to Buy builder and there are limits to the loan depending where you live.
Fees for equity loans are charged from the 6th year after the home purchase.
Repaying Help to Buy equity loans
You must pay back your Help to Buy equity loan 25 years after the purchase of the property or when it is sold (whichever comes first). The amount you’ll pay will depend on the market value of your home when you pay (and not when you bought it). You can of course choose to pay back part or all of the loan at any time before the 25 years are up but the smallest payment is 10% of your home’s market value.
Pros and cons of equity loans
These loans are an excellent opportunity to get on or move up the property ladder. However, they are loans – rather than grants – and must be repaid. The danger could be that some buyers might put the idea of repaying the loan to the back of their minds since it seems such a long way away. However, you should start thinking about how you can save to pay off the loan in the early stages. Otherwise, you’ll be forced to sell your home when the loan becomes due in 25 years (whether you want to or not). Alternatively, you would have to think about re-mortgaging your property at a time when most mortgage holders are looking forward to having paid off their lender and even preparing for retirement. Despite continual increases in house prices, who knows what the property market will look like then.
The other drawback of Help to Buy equity loans is that you have a limited choice of location since not all new-build developers are registered for the scheme. If you need to move further afield to find a property, you should weigh up the relative commuting costs before making a final decision.
What are Help to Buy ISAs?
Help to Buy ISAs are a government scheme which help first-time buyers who are saving money for their home purchase and are run in conjunction with certain banks, building societies and credit unions. In the first month you’re allowed to deposit a lump sum of £1,200 but after that, the maximum deposit is £200 per month.
Help to Buy ISAs are a government scheme which help first-time buyers who are saving money for their home purchase.
The government will add a further 25% bonus to top up your savings within certain limits. The minimum bonus is £400 (on savings of £1,600) and the maximum bonus is £3,000 (on savings of £12,000 or over).
This scheme is due to run from December 2015 until November 2019 although ISA holders have until December 2030 to claim their bonus.
Questions:
How much has the government invested in Help to Buy equity loans?
The government has provided £9.7 billion of investments for the Help to Buy equity scheme.
How many would-be buyers is it intended to help?
It’s estimated that 194,000 home buyers (both first-time and previous property owners) will benefit from this equity loan scheme.
What is the Help to Buy Mortgage Guarantee scheme?
This scheme gave a guarantee to the lender rather than to the borrower to encourage mortgage providers to award loans to buyers with a small deposit. Unfortunately, the government didn’t extend this scheme and it was discontinued in December 2016.
How many new houses are built in the UK every year?
According to the Office for National Statistics, there were 152,440 new-builds constructed in 2015 (compared to 251,820 in 1980 or a drop of 40%).
Who’s eligible for Help to Buy ISAs?
To be eligible for Help to Buy ISAs, you must be over 16; have a valid National Insurance number; be a UK resident and be a first-time buyer. The property which you wish to purchase must be your only home; be the place you intend to live (rather than rent); be worth up to £250,000 (or £450,000 in London) and must be bought with the help of a mortgage.
How to apply for your Help to Buy ISA bonus
You’ll only receive your Help to Buy ISA bonus when your property transaction has reached completion. You should instruct your solicitor or conveyancer to apply for the bonus on your behalf. If for some reason the property transaction falls through, the bonus must be returned to the government and you’ll receive a ‘purchase failure notification’.
Pros and cons of Help to Buy ISAs
The main advantage of Help to Buy ISAs is that you can withdraw your money at any time without any penalties so they’re quite flexible. Also, as they are a bonus (rather than a loan), they don’t have to be repaid. This saving scheme is used towards the purchase price of the property to increase your share. However, the fact that it’s released at completion means that it can’t be used for any of the extra costs of buying a property such as the Stamp Duty Land Tax. This is the main drawback for would-be buyers saving for their first home.
Summary:
Help to Buy equity loans must be repaid at the latest 25 years after purchase or when the property is sold, based on the re-sale price of your home then.
Equity loans are a useful way to find affordable property but provision must be made to repay the loan and there may be limited choice of property in the area you’d like to live.
Help to Buy ISAs give first-time buyers a government top up of 25% of their savings for a home within certain limits.
There are certain eligibility rules for receiving the ISA government bonus.
ISA bonuses don’t have to be repaid but they can’t be used for the deposit or other home purchase expenses.
What are Life-Time ISAs?
Life-time ISAs (or LISAs) are a newly-launched saving scheme for the provision of a pension or for putting money by for a home deposit. LISA holders are allowed to deposit lump sums up to a limit of £4,000 per year and the 25% bonus is paid annually.
Who’s eligible for LISAs?
To be eligible for the LISA saving scheme, you must be aged between 18-39 and never have owned property anywhere else in the world before. The property must be worth £450,000 or less and it must be your main residence so you aren’t allowed to rent it out after purchase.
Receiving your LISA bonus
Seeing as the bonus is awarded annually, you don’t need to go through an application process as you do with Help to Buy ISAs. However, your LISA account must have been open at least 12 months before you’re entitled to a bonus. The only condition is that the property must be bought within 90 days of withdrawing the money from your LISA account.
Pros and cons of LISAs
LISAs offer greater flexibility than ISAs in how big your deposits are and also how much you’re allowed to pay in per year. In addition, you’re free to withdraw your savings at any time after the first 12 months. As a result, LISAs can be used to pay towards your home deposit or the hidden costs of buying property.
The only disadvantage is that they were only launched in April 2017 and as yet there has been limited take-up by financial institutions so you may have trouble in the initial stages finding an account.
The Starter Home scheme
This new initiative is still in its planning stages and it’s believed to be starting in late 2017-early 2018. The scheme will be run by local authorities together with construction companies. New-builds will be constructed on brownfield sites designated by councils; the location, timing and numbers of Starter Homes will depend on the availability of suitable land.
Builders will offer property at a 20% reduction in price in return for exemption from the Community Infrastructure Levy (a tax builders pay to local authorities for the construction of infrastructure such as roads, etc.).
Who will be eligible for the Home Starter scheme?
As yet, the details of eligibility haven’t been finalised but the scheme is aimed at young first-time buyers aged under 40 who wish to purchase a new-build. There will also be restrictions on the salary they earn, which will be a maximum of £80,000 per household outside London and £90,000 within the capital.
The Starter Home scheme will be run by local authorities together with construction companies and it’s believed to be starting by early 2018.
The maximum price for the property will be £250,000 outside London and £450,000 inside. There will also be letting and post-sale restrictions imposed for anyone taking part in the scheme.
Summary:
Life-time ISAs allow you to receive a 25% bonus on savings for home deposits of up to £4,000 per year and the bonus is paid annually.
There are certain restrictions for people taking part in the LISA scheme.
LISAs offer flexibility with the size of your deposits but you must have the account open at least a year and you may have difficulties in opening an account.
The Starter Home scheme is a new initiative whose details haven’t been confirmed yet but it will offer new builds to first-time buyers at a 20% discount with eligibility criteria and certain restrictions.
Applying for the Starter Home scheme
As yet, it isn’t possible to register for this scheme although you can add your details to the database of the Home Builders Federation site. You will receive updates of the latest news as well as any changes in eligibility criteria and restrictions.
Pros and cons of the Starter Home scheme
Until the scheme gets underway, it’s difficult to balance its advantages and disadvantages. However, there are a number of points to think about.
The main benefit of this initiative is that, if you’re a first-time buyer, it makes the purchase of a new-build affordable for you instead of buying an older property and having to spend more on maintenance. However, it isn’t definite that there will be a Starter Home scheme in your area so you might have to think about moving (if possible) or weigh up the increase in commuting costs.
Some people have expressed concern about how the scheme’s 20% discount will be calculated by the builders if there are no similar properties in the area to reach an agreement on the properties’ market value. Also, there are worries that local authorities won’t be able to afford to provide the necessary infrastructure if property developers don’t pay the levy. Finally, the government initial white paper said that there would be re-sale restrictions. This could mean that you might find it difficult to sell the property and/or have to re-pay the discount as if it were a loan. Unless discussions are held beforehand with mortgage providers, access to a mortgage might also be harder until the scheme is better-established.
Questions:
Can we open two Help to Buy ISA accounts?
Yes, if you’re buying a property together, you’re both entitled to your own bonus from a Help to Buy ISA.
What does a brownfield site mean?
A brownfield site is one which has previously been developed and might have been used for industrial or commercial purposes but is now standing empty or is derelict so it has the potential for redevelopment.
How many councils have expressed an interest in the Starter Homes scheme?
So far, 1 in 3 councils have said they’re interested in taking part in the Starter Homes scheme and 30 of them had officially signed up as of January 2017.
How much has the government allocated for the Starter Homes scheme?
Central government has allocated a £1.2 billion fund to get this scheme off the ground.
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