In the UK, the government has put several schemes for first-time buyers in place to help people trying to get onto the property ladder. With rising house prices, recessions and not much movement to the national living wage - it is the hardest it’s ever been to get there. That is why it is so important to know what options are available to you for receiving a little extra help towards that dream.
While we know how difficult it is and are aware of the common struggles young people are facing nowadays, it doesn’t mean the desired result is impossible to achieve. As we said - we are lucky in the fact that there are many ways you can receive financial assistance, advice and help to hit those all-important saving goals.
With that in mind, let’s take a look at what’s on offer at the moment and which options may be best for you.
It is simple really. To be qualified as this term, you and anyone you’re buying the property with must be purchasing your very first residential property. If you’ve owned (not rented) a house or flat before, you’re unlikely to be eligible for much of what we’re about to discuss.
Because of this, it is always worth consulting your bank or advisor before looking into major financial decisions.
This is a loan from the government that you can combine with a small deposit and a mortgage to help you buy a new-build property. You can usually receive between 15% and 40% of the property price, depending on where you live in England. The only catch is that you will need at least a 5% deposit to top it up and be able to get a mortgage agreed to cover the rest.
There are two main benefits to this approach.
Firstly, you only need a deposit of 5%, rather than the normal 10% or 15%. This means you don’t need to save as much or use as much of your money that’s been put aside to cover the initial sale.
Secondly, you will have more access to better mortgage rates as you will only need to cover a small percentage of the property’s value. For example - if you enter with a 5% deposit and a 20% help to buy equity loan, you will only need a mortgage to cover the remaining 75%. As a result, you could be looking at lower monthly payments, to begin with and better mortgage rates overall.
These kinds of schemes for first-time buyers are based on property value. This means you have to be cautious of the ever-changing property market. So even though you are taking a 20% loan - you could end up paying more than you received due to the increased house prices.
For example, if you bought a £200k property but sell your home with Beals a few years later for £250k, a 20% loan will have increased from £40k to £50k in light of the increased property value. As a result, you will need to pay back £10k more than you borrowed to purchase the house.
NOTE - This scheme was closed for new accounts in 2019, so the information below only applies to those who opened a help to buy ISA before 30th November 2019.
Any contribution you make to your help to buy ISA will receive a 25% contribution from the government up to £12,000. This means you could be entitled to an extra £3000 towards your house deposit if you save the full amount.
If you managed to start saving in a help to buy ISA, you now have until 2029 to add funds and then a further 12 months to claim your government bonus. All of your savings are tax-free.
The clear advantage of this is receiving extra tax-free money from the government! They are essentially topping up your house deposit as a reward for saving money. Also, both your initial deposit and monthly contributions qualify for the 25% bonus so you won’t be missing out on any pennies.
Another benefit is true if you are buying with someone else. Since you can both qualify for these ISAs, it means you would be eligible for £6000 extra from the government to help with that deposit!
Although you are entitled to an initial deposit of up to £1000, you can then only contribute £200 a month to your ISA. This can prolong the saving process for some people and means you are limited to what you can put away.
Also, the government bonus only gets paid out when you are buying your first home. This means you cannot use it for any other purchases, even in an emergency. It has one specific purpose and then of course could not be used again to buy a second property.
Another disadvantage is the cap on property prices. For example, if you live outside of London, you must be intending to buy a property worth LESS than £250k. However, due to the hefty difference in the property market, this increased to less than £450k inside of London.
If you can’t quite afford the mortgage on 100% of a property, shared ownership offers you the chance to buy a share of between 10% and 75% of the home and pay rent on the rest. (It doesn’t mean you need to share the house with other people.)
If you do not own another property and your total household income is less than £80k a year you will be eligible to buy this way. It is essentially a middle ground between owning and renting that allows you to buy more shares in the property as and when you can afford it.
You’ll only be paying a mortgage on the percentage of shares you own. This means the money needed for a deposit will be a lot less. As a result, it is much easier for lower-income families to get onto the property ladder.
Furthermore, this method is more preferable to renting as the shares you own will increase in value if the price of the property goes up. This means you will have a nice bit of equity to lean on when you decide to take the next step to full ownership.
First and foremost, you are still a tenant. This means you may need to ask the housing association for permission to make changes or improvements to the property. Similarly, you may need to pay fees for maintenance to communal areas if there are any.
Also, if you later want to move on and sell your home, you could run into some trouble making a quick sale. This is because you could be limited to who can buy the home and other restrictions may make it difficult to get rid of.
Also known as LISAs, this falls under the same branch of schemes for first-time buyers as the help to buy ISA.
Similarly, the government will still pay a 25% bonus on anything you contribute up to a set limit each year. However, with a LISA you are entitled to add up to £4000 a year rather than the £200 a month cap on help to buy. This means that the most you can claim from the government in 12 months is £1000.
The major difference between the two is that you can use a lifetime ISA for more than purchasing a property. You are also allowed to withdraw funds for retirement once you reach 60. This means you can continue paying into the account AFTER you have bought your first home - it will just have to remain there until you’re 60 years old!
Firstly, it is, of course, worth mentioning that while they are similar, the lifetime ISA is still available to you. You can no longer apply for a help to buy ISA.
Obviously, gaining an extra £1000 a year to help towards a deposit is a huge benefit of this scheme. But beyond that, you can’t forget that not only are the contributions you make tax free. So is any interest and government bonus you earn on it.
As well as this, the larger cap means your saving goals could be hit much quicker and you will be well on your way to getting on that property ladder in a couple of years. Also, unlike with a help to buy ISA, you are not limited to one purchase. You can keep adding to it to top up your pension pot and receive a nice profit on top!
One potential drawback is that your £4000 a year allowance on LISAs also contributes to your cap on other ISAs. This means that should you save the full amount, you will only be able to invest up to £16k in other places.
Also, should you need to withdraw any funds for reasons other than purchasing a property, becoming terminally ill or retiring at 60, you will incur a 25% exit penalty fee. Even transferring your LISA to a different account would see you getting less than you put in.
We are lucky to have so many schemes available to us in the UK to help young people get on the property ladder. It can be really useful for low-income families and solo-buyers. However, there are always things to consider when looking to open new accounts and so your financial status, personal situation and future plans should all be considered before making a decision.
Also, don’t forget that many of these can only be used to purchase your first home. If you are already a homeowner, you will not be entitled and you cannot use the scheme again after becoming one. So take your time to research thoroughly and think about which looks right for you.
But for any more advice or help starting the journey to your dream home, give us a call! We offer an unparalleled experience which is why we have so many repeat customers, we know how to get it right every time. Whether you be a buyer, seller, landlord or tenant, we've got you covered. Contact us here by submitting an enquiry form or call one of our dedicated branches, the individual contact numbers for each can be found here.