Everything you need to know to get onto the property ladder
Buying your first home can be a real challenge, particularly given steep house prices in many parts of the UK.
The good news is that there are lots of things you can do, including taking advantage of government first time buyer schemes, which can make getting on the housing ladder a little bit easier. Here’s our rundown of some of the options available to first time buyers which can help turn the dream of owning a property into a reality.
Get saving for a depositThe bigger the deposit you can save, the easier it will be to get on the property ladder and the wider the choice of mortgages you’ll have available to you. Although 100% mortgages do exist, they are usually dependent on parents agreeing to keep a percentage of the purchase price in a separate savings account.
If you’re struggling to save, write down a list of all your outgoings and look at any non-essentials you might be able to cut out. Even doing small things like taking your own packed lunch to work rather than buying it every day can result in big savings over a year. Lenders offer favourable rates to those with larger deposits to put down, so the more you can put away, the cheaper your monthly mortgage payments are likely to be.
Help to BuyHelp to Buy is a government scheme designed to help people with limited deposits buy their first property or move home.
How does the Help to Buy scheme work?Originally there were three parts to Help to Buy, an equity loan, a mortgage guarantee scheme, and an individual savings account (ISA).
The equity loanUnder the equity loan part of the scheme, which is available to first time buyers and those moving up the property ladder purchasing new-build properties costing up to £600,000, you need to put down a 5% deposit. The government will lend you a further 20% of the property price interest-free, or 40% if you’re buying in London, for the first five years.
After the five-year interest-free period finishes, you’ll be charged interest on your loan from the government at 1.75%. The interest rate will increase every year by the rate of inflation, as measured by the Retail Prices Index (RPI) plus another 1%.
The current equity loan scheme is due to finish in March 2021. It will be replaced by a new equity loan scheme which will run until March 2023. The new scheme will only be available to first time buyers, who will be able to purchase properties up to the value of new regional price caps, shown below, using a 5% deposit.
New Help to Buy regional property price caps
(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 analysis
This scheme ends in 2023, and there are currently no plans to introduce any further equity loan schemes.
The mortgage guarantee schemeThe mortgage guarantee part of Help to Buy aimed to help buyers with only a 5% deposit by enabling lenders to buy a guarantee on their loans, but this part of the Help to Buy scheme finished at the end of 2016.
The ISAThe Help to Buy Individual Savings Account (ISA) was designed to help first time buyers save up a deposit.
Savers could initially pay in up to £1,200, followed by up to £200 a month, and the government will add another 25% to any contributions you make. The maximum bonus you can claim is £3,000.
Help to Buy ISA accounts closed to new savers on 30th November 2019. If you already have an account, you can keep saving into it until 30th November 2029, after which additional contributions will no longer be allowed. The government bonus must be claimed by 1st December 2030.
Who is the Help to Buy scheme for?Help to Buy is designed for both first time buyers and existing homeowners who are finding it hard to move up the property ladder. Properties bought under the equity loan part of the scheme must be new build homes, and cost no more than £600,000. You can’t use the scheme to buy a property to let out.
Advantages of the Help to Buy schemeYou need a smaller deposit. The equity loan is interest-free for the first five years.
Disadvantages of the Help to Buy schemeYou’re restricted to new build properties only, so if you want to buy an older property, you won’t be eligible. You can only buy a property from house builders registered to take part in the scheme. When you sell, you’ll need to pay back the government the percentage it contributed.
Right to BuyThe Right to Buy scheme enables council tenants in England to buy their council home at a discount.
How does it work?Right to Buy gives you a discount on the market value of your home up to £82,800 across England, or up to £110,500 if you’re in London. The amount increases every year in line with the Consumer Prices Index measure of inflation. The actual discount you’ll receive depends on how long you’ve been a tenant, the value of the property, and the property type, for example, whether it’s a flat or a house.
Who’s it for?Council tenants whose council property is their only or main home, and the property is self-contained. You must have had a public sector landlord such as a council or housing association, for three years.
Advantages of Right to BuyYou’ll get a discount off the property’s market value, to help make buying your property more affordable.
Disadvantages of Right to BuyIf you’re buying a flat, you’ll have to pay a service charge to the council or housing association for the building’s maintenance. You won’t qualify for housing benefit once you own the property.
Shared OwnershipShared Ownership schemes allow you to buy a share of a property from a council or housing association, and pay rent on the remaining part, with an option to buy a bigger share later.
How does shared ownership work?You can buy an initial share in the property for between 25% and 75% of the property’s value. You can buy further shares, known as staircasing, up to a value of 100% of the property later if you want to.
Who’s it for?You’ll be eligible 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.
Advantages of shared ownershipThe amount you’ll have to put down as a deposit is much smaller, as you’re only buying part of the property. The scheme makes owning a property more affordable for those who wouldn’t be able to buy a home outright.
Disadvantages of shared ownershipWhen the property is sold, you’ll only make a profit on the portion of the property you own. The remainder will go to the housing association or council. If there’s a loss, this will also be split between you and the council or housing association relative to the shares you own.
Co-ownership in Northern IrelandCo-ownership in Northern Ireland works in a similar way to Shared Ownership in England, enabling first time buyers to purchase a share in a property and pay rent on the part they don’t own.
How does Co-ownership in Northern Ireland work?You can buy a minimum share of 50% in a property or if you can afford a bigger share, you can buy up to a maximum of 90%. You’ll have a mortgage on the part of the property you own, and you’ll pay rent on the remainder to the Northern Ireland Co-ownership Housing Association (NICHA). The property you want to buy can’t cost more than £165,000.
Who’s it for?First-time buyers in Northern Ireland age over 18. You can’t own any other property and the property you want to buy can’t be a housing association property.
Disadvantages of Co-ownership in Northern IrelandYou’ll only be eligible for Co-ownership if you couldn’t afford to buy a property without the scheme. You’re responsible for all repairs in the property.
Borrow from Mum & DadIf you are fortunate enough to have family who are prepared to provide you with financial help, there are various ways they can support you. For example, they may agree to loan you the money you need for a deposit, or they may act as guarantors or by taking out a mortgage jointly with you.
Some mortgages are specifically designed with parental support in mind, enabling spare equity in the parental home to be used as additional security.
Parents who agree to become joint owners and who also own their own home must remember that this could lead to a capital gains tax (CGT) liability and incur a stamp duty surcharge on the additional property.
Build your own houseIf you can’t find an affordable property, you might want to consider buying a plot of land and building your own home.
You’ll need to be certain you can obtain planning permission, or you may want to buy a plot which already has it. You’ll also have to take out a self-build mortgage. These differ from conventional mortgages as money is released in phases as you finish each part of the build. You usually won’t get a self-build mortgage until planning permission has been granted.
Building your own home can be exciting, but it’s easy for costs to spiral out of control, so you’ll have to be disciplined about sticking to your budget. Ideally you should have a contingency fund of at least 10% of the build cost in case of any unexpected bills. Don’t forget you’ll still be paying rent while your home is being built too.