HOW TO BUY A FIRST HOME
YOU HAVE MORE OPTIONS THAN YOU MAY THINK, SAYS ROSIE MURRAY-WEST
THE property ladder can sometimes feel like a very uneven structure. Once you are on it, it is possible to advance – but the first rung often appears impossible to reach for many would-be buyers.
The problem became even greater for first-time buyers during the course of last year, with banks pulling loans for those with small deposits, and making it harder for the self-employed to pass mortgage checks.
However, a number of schemes exist aimed at helping first-time buyers into a home of their own. They are all different, and each has its merits and its drawbacks, so it can be hard to work out which is right for you.
Here is a rundown of the different schemes available, so that you can work out which might best suit your circumstances.
SHARED OWNERSHIP How it works
If you can’t afford a home outright, shared ownership allows you to buy a share of a property, between 25 per cent and 75 per cent of the whole thing. You pay rent on the portion of your home that you do not own and can buy more shares in the property later, when you can better afford it – a process that’s known as ‘staircasing’.
The benefits
You can buy a shared ownership home with a relatively small deposit, and there’s some older properties available through housing associations, so you may not be restricted to new-builds. Rent payments are usually lower than commercial rents. There’s a special version of shared ownership available for older people.
The down sides
There are restrictions. ‘ The majority of shared ownership properties are also leasehold and come with a short lease,’ says mortgage adviser Kev Tilly from Mortgageable.co.uk.
‘This makes them progressively more difficult to sell. It also makes it more difficult to secure planning permission for extensions.’
You must earn less than £80,000 a year to qualify for shared ownership, or £90,000 a year in London. You can only apply for shared ownership mortgages, making it difficult to shop around.
Good if you…
like the shared ownership properties that are available and that you know you will have steadily increasing income to buy more shares in your home in future.
Avoid if you …
might need to move on before very long. Jeremy Leaf, north London estate agent and former Royal Institution of Chartered Surveyors residential chairman says it can be difficult to sell up.
‘It can be relatively easy to buy into but not so easy to get out of when perhaps the buyer’s circumstances have changed.
‘Buyers should always take professional advice before committing to a purchase,’ he adds.
How it works:
The Help to Buy equity loan adds an interest-free loan from the Government to your house deposit, to increase your firepower when buying a home.
Those who want to use Help to Buy combine their own deposit – which must be a minimum of five per cent of the purchase price of the home – with a government-backed loan that covers up to 20 per cent of the purchase price, or 40 per cent in London.
This then allows the buyer to apply for a smaller mortgage, possibly at better rates, for the remainder of the price of the property. The loan is interest free for the first five years but in year six you must begin to pay interest on it. The loan must be paid back within 25 years, or earlier if you decide to sell up.
When you sell your property, or the mortgage is paid off, you have to repay the equity loan plus a share of any increase in the value of your home. If you pay back the loan early, the amount you must find depends on the property’s value at the time.
First-time buyers who want to purchase a new-build home are the only ones who can use the scheme, which has a cap on the purchase price of the property you can buy, depending on average values in the region you are buying in.
The benefits
Help to Buy gives the chance of owning a home to many who wouldn’t otherwise be able to afford one, and can significantly increase your borrowing power.
The downsides
Not everyone wants to buy a newbuild property, and such homes can be overpriced.
If a property rises in value you won’t get all of the uplift – because when you sell your home, or the mortgage is paid off, you have to repay the equity loan plus a share of any increase in what the place is worth.
Remember, if you pay back the loan early, the amount you will end up having to find depends on the value of your home at the time.
After five years, you will start to pay interest on the equity loan and the interest rate rises each year in line with consumer price inflation plus two per cent, meaning that it could end up very expensive.
Good if you…
want a new-build property and really need to borrow more to get what you need, especially if you are a family needing more bedrooms than you can afford any other way, according to senior mortgage and protection adviser Chris Blackwell, of TED Mortgages in Swindon.
Avoid if you…
prefer a home with period features – although do look around for new-build
conversions which often retain period features – and can get on the ladder without government help.
LIFETIME ISA How it works
A Lifetime Isa – sometimes known as a Lisa – gives a boost to your savings for a house deposit thanks to top-ups from the Government. The money can also be taken out to pay for retirement but there is a hefty penalty if it is withdrawn for any other purpose.
The benefits
The Government will give you a bonus worth 25 per cent of what you pay into a Lisa. You can put in £4,000 each year, and the Government will add a maximum of £1,000 on top of that, annually. You can open a Lisa when you are 18 and add to it until you are 50. If you save into it for the maximum length of time, you can get £33,000 of ‘free’ Government cash.
The drawbacks
A Lisa can only be used to buy your first home, not to upsize, and can only be opened by under-forties. If you do not use the money for your deposit, you can’t get it out without losing the benefit and facing an extra charge, or waiting until you are 60 to take it as part of your retirement savings.
Good if you…
want a boost to your deposit savings. ‘The Lisa is a great way to get on the property ladder and the government bonuses help to increase the deposit,’ says Jay Lee, who runs mortgage advice course uAcademy.co.uk.
Avoid if you…
are not a first-time buyer, or if you aren’t sure you’d use the money for a deposit on a suitable home.
95 PER CENT MORTGAGE How it works
The Government is incentivising lenders to offer mortgages to those who only have a five per cent deposit, after nearly all of the deals available to would-be buyers with this level of savings were pulled during the pandemic. The Government’s 95% Mortgage Scheme launched yesterday so more deals will likely appear soon.
The benefits
Those who haven’t managed to save a large deposit will be able to get on to the property ladder and some will be able to buy bigger homes as a result or get better rates on their mortgages.
The drawbacks
Those who are self-employed or who don’t have a spotless credit record will still struggle to get lenders to accept them.
Good if you…
Can’t raise more money and need to buy now. ‘The new mortgage guarantee scheme is fantastic news for those who have struggled to get a foot on the housing ladder,’ says Anth Mooney, chief executive of Vida, the specialist lender.