First-time buyer mortgages can be easier to secure if you take advantage of certain government schemes
Stepping onto the property ladder can be especially daunting for first-time home buyers in the UK. Skyrocketing home values in London aside, the cost of housing in many parts of the UK remains out of bounds for many Brits.
The good news, however, is that you may have options to break into the market. The UK government is offering numerous first-time home buyer schemes.
For instance, the help-to-buy scheme aids Brits by providing a boost during the home-buying process. With a shared ownership scheme, on the other hand, you can own a portion of the property and increase shares as you see fit.
Here is everything you need to know about first-time buyer mortgages in the UK. For the mortgage professionals who frequently visit our site, this article could serve as a good tool to help educate a client with questions about first time buyer mortgages in the UK. Feel free to share this with them!
How do I qualify as a first-time buyer?
Generally, the definition of a first-time home buyer in the UK is someone who buys a home or a flat who has never owned one before and has no home to sell. In other words, it means you are not a homeowner, an investor, or mortgaging or re-mortgaging existing homes. While this definition seems obvious, you may be surprised about how many people assume they qualify as a first-time home buyer who are not.
First-time buyer mortgage: Stamp duty
Qualifying as a first-time buyer is somewhat coveted, since it means you will have access to some of the cheaper mortgage deals on the market.
As of November 2017, it also meant that first-time home buyers across the UK qualified for stamp duty relief. Under the stamp duty relief, first-time home buyers were exempt from paying stamp duty on purchases up to £300,000 and a rate of just 5% on properties between £300,001 and £500,000.
How much deposit do first-time buyers need for a mortgage?
In the UK, you generally need to make a deposit of at least 5% of the cost of the property you want to purchase. This means, if you want to buy a home that costs £150,000, you will have to save at least £7,500, or 5%, for the deposit. If, however, you came make a deposit of more than 5%, you will have access to more—and cheaper—mortgage options and a lower interest rate.
A first step to take here is to talk to a great mortgage professional in your area. They will be able to give you the type of personalized advice that will truly make a difference in your home purchase.
Learn more about home loans for first time buyers in the UK here.
What schemes are available for first-time buyers?
There are many government schemes available for first-time home buyers in the UK. Here is a look at some of the more popular schemes:
- Help to buy
- Shared ownership
- Right to buy
- Lifetime ISA
Here is a closer look at the government schemes available to first-time buyers in the UK:
1. Help to buy
The first note that must be made here is that you are no longer able to make new applications under this scheme. It has been closed, and all those who have applied and been approved must complete the purchase of their home by March 31st, 2023.
For the help-to-buy scheme, the UK government loans first-time home buyers the money for a new-build home. If you are interested in this scheme, you will have to make a deposit of 5% and borrow 20% of the purchase price of the property. If you live in London, that 20% increases to 40%. You will not have to pay any interest on the loan for five years.
After that initial deposit and loan, you will have to secure a loan for the remaining 75% of the property price (minus your 5% deposit and the government’s 20% loan). If you are based in London, that 75% turns into 55% (minus your 5% deposit and the government’s 40% loan).
The equity loan from the help-to-buy scheme must be repaid in full after 25 years, if you sell your property, or when your repayment mortgage has been paid off.
2. Shared ownership
The shared ownership scheme differs from the help-to-buy scheme in that with shared ownership you only own a portion of the home (whereas help-to-buy gives you legal ownership of 100% of the property).
Shared ownership essentially breaks down like this: you purchase a share of the property from the landlord—typically the council or a housing association—and pay rent on the rest. You will, however, need a mortgage to pay for your share of the property, which is usually between one quarter and three quarters of the value of the home. If you choose, you can purchase a larger share of the home and increase that amount until you own 100% of its value.
3. Right to buy
The right-to-buy scheme is only available to those who live in England or Northern Ireland. The scheme allows you to purchase a home at a discount if you are a housing association tenant or a council house. If you live in England and fail to qualify for the right-to-buy scheme, you may be able to secure a discount under the right-to-acquire scheme.
The maximum right-to-buy discount differs depending on your area:
- London: £116,200
- Rest of England: £87,200
- Northern Ireland: £24,000
If you sell the home in five years, you will have to repay your total discount, or a portion of the discount, as well as any share of the profit.
4. Lifetime ISA
A Lifetime ISA stands for a Lifetime Individual Savings Account. You can use a LISA to purchase your first property or save. The property in this case must cost £450,000 or less and you must be between 18 and 39 to open a LISA.
You can contribute up to £4,000 per year into the LISA until you are 50 years old, and you have to make your first ISA payment before you are 40 years old. The UK government will add a bonus of 25% to your savings (to a maximum of £1,000 per year). If you are purchasing a home with another first-time home buyer who also has a LISA, you can both use the LISAs toward the same home.
There may, however, be a drawback to using this scheme. There is a penalty for taking money out of a LISA if you are not using it for a deposit, or if you withdraw it after you are 60 years old.
How does first-time buyer scheme work?
The most popular government scheme for first-time home buyers in the UK is the help-to-buy scheme. This scheme allows buyers to purchase a home with a deposit of 5% of the purchase price of the property. It also means that you can borrow 20% of the purchase price in most of the UK and 40% in London, without interest for five years.
You will have to borrow the rest of the payment—75% or 55%, if you live in the capital—from a mortgage lender on a repayment basis. You will not have to pay interest on the equity loan for five years. After that period, you will be charged 1.75%, which increases by the Consumer Price Index (CPI) plus 2%.
The equity loan must be repaid after 25 years or when you sell your property. You have to pay back the same percentage of the proceeds from the sale of the home as the initial equity loan, meaning that if you got an equity loan of 20% of the purchase price, you must pay back 20% of the proceeds of any future sales.
This also means that if the market value of the property increases, the amount that you owe on your equity loan will increase with it. If the value of your property decreases, the amount you owe on your equity will decrease also.
As we have seen, there are many programs and schemes available to first-time home buyers in the UK. Stepping onto the property ladder can be a very tricky, and we invite you to watch mortgage industry trends in the UK to continue learning.
Do you have experience with first-time home buyer mortgages in the UK? Let us know in the comment section below.
