Government schemes for first time buyers
There are a range of government schemes available to help first time buyers get on the property ladder, including the mortgage guarantee scheme, and Shared Ownership.
In this section, we will look at how the various Government schemes for first time buyers work, and explain who is eligible to apply.
In this guide
Shared ownership mortgages
The Shared Ownership scheme enables you to buy a share of a property and pay rent on the remaining part.
Under the scheme, you can buy further shares in your property if you’re able to. Each additional share used to have to be equivalent to at least 10% of the property value, but since April 2021, you’ve been able to buy 1% shares.
You can qualify for Shared Ownership if your household earns £80,000 a year or less outside London. This rises to £90,000 if you live in the capital.
You must be a first time buyer, or have previously owned a property but now can’t afford to buy one, or you already own a share in your home but want to move. You’ll need to take out a Shared Ownership mortgage to pay for your share of the property.
Mortgage guarantee schemeThe mortgage guarantee scheme was unveiled in the March 2021 Budget and is designed to help buyers with a small deposit to get a mortgage on properties costing up to £600,000. It works in a similar way to the previous Help to Buy mortgage guarantee scheme which ended in 2016, and is scheduled until December 2022.
Both first time buyers and homeowners looking to move up the property are eligible for the scheme, and only need to put down a 5% deposit. Lenders are provided with a guarantee from the Government which will compensate them if the property is repossessed or sold for less than the value of the outstanding mortgage.
Under the terms of the scheme, lenders must offer a five year fixed rate within the new product range, which will help buyers looking for peace of mind that their payments won’t change if interest rates go up in future.
Bear in mind that some lenders continue to offer 95% mortgages, even without the Government guarantee. Seek advice if you’re not sure which type of mortgage is likely to suit your needs.
Help to Buy equity loan
The Help to Buy equity loan scheme, which was available to first time buyers who have a deposit of 5% to put down, closed to new applications on 31st October 2022. Those who applied before this date have until the end of March 2023 to complete their purchases.
Under the scheme, rather than taking out a mortgage for the remaining 95% of the property value, the Government would lend buyers 20% of the property price, and so they’d only need a mortgage for the remaining 75%.
Those buying a property in London could borrow up to 40% of the property price, meaning they’d only need a mortgage for 55% of the property value.
(Price cap for properties eligible for Help to Buy Equity Loan scheme from April 2021 to March 2023)
North East £186,100
North West £224,400
Yorkshire and The Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
South East £437,600
South West £349,000
Source: HM Treasury
The Government equity loan is interest-free for the first five years. After that, you pay a monthly interest fee of 1.75% of the equity loan. The interest rate will rise each year in April by the Consumer Price Index (CPI) measure of inflation, plus 2%.
The loan can only be used to buy your main home, and not a Buy to Let property.
These rules only apply to properties in England, but Scotland, Wales and Northern Ireland ran similar schemes, with the Wales scheme still open for applications until 31st March 2023.
Help to buy equity loan repayment
Those who’ve bought a home using a Help to Buy Equity loan don’t have to pay any interest for the first five years, and the loan only needs to be repaid when the property is sold, or at the end of the mortgage term - whichever happens first.
Paying back your Help to Buy equity loan early
There are a number of reasons those who’ve bought under the Help to Buy scheme may wish to pay back their equity loans early, the most common being they want to own your property outright. They do have the option to pay back some or all of the loan before the five-year interest-free period runs out (interest on the loan is payable). However, there are limitations to this.
Before the five-year interest free period ends, you don’t have the option of chipping away at the loan with monthly payments. You can either clear the whole loan in one go, or you can make a partial repayment, but this must be for a minimum of 10% of the property’s current value. This is known as “staircasing”.
So, if your entire equity loan is the minimum 10% of the property value, then you will have to pay back the full 10% in one go. If your equity loan is 20% of the property value, you have the option of paying it back in two 10% chunks, or one 20% payment.
Independent Property Valuation
To work out exactly how much you’ll need to repay, you’ll first need to have the property independently valued by a surveyor. You can find a surveyor near you using the RICS website. Be aware that you will have to pay for this valuation (the cost varies depending on the size of your property), and it’s only valid for three months.
By paying off your equity loan early, you are buying back equity in your property. So just like a property purchase, you’ll need to enlist the services of a solicitor to handle your conveyancing. There may also be an administration fee to pay. This is usually around £200 which is payable when you pay back your Help to Buy equity loan, or if you repay part of it.