Ways of getting on the property ladder for the first-time buyers

Saving the deposit for a house can be very difficult and can take a long time to achieve. This is why it is very important to be aware of the different type of schemes that are available to help you with this process. The schemes mainly benefit first time buyers and enable them to raise a deposit which is less than the required 10% to 20% of the property price whilst benefiting from prevailing low interest rates. In this blog I will be looking at some of the schemes that are currently available in the UK. I will be looking at family mortgages, help to buy and shared ownership 

Family Mortgage 

This scheme enables family members to assist the applicant with money required for a deposit in order to purchase the house without taking a share of the property or spending their money. This enables the applicant to benefit from low interest charges and repayments. 

How it works

In a normal situation, if you raised a deposit that was less 10% of the value of the property, the Bank charges higher interest rate and this in turn increases the monthly repayments. Family mortgages enable you to raise smaller deposit amounts whilst benefiting from low interest and monthly repayments. Family members and friends can assist you to buy the house by essentially being guarantors for the mortgage you take out.

The family member or friend can deposit money into a security account, use part of the value of their house or use their savings for the duration the banks states which is normally 5 to 10 years. Where the money is deposited into a security account with the bank, it will gain interest. The family members are unable to withdraw it or the savings during this time. Once the time lapses, the mortgage is reviewed, the money including interest gained is given back to the family members. The money or the value of the property is used by the bank to reduce interest charges for low deposits which in turn reduces monthly repayments.

Advantages 

• This makes it easier to get on the property ladder, as the amount required is reduced but you still benefit from low interest charges.
• Once the time period set by the bank lapses and there have been no repayment problems, the mortgage is reviewed and the guarantors may not be required
• You own 100% of the house even though you family is assisting you
• Some banks help if you have income issues during this time. For example, Family Building Society will meet your repayment needs for 6 months as a one off during the 10-year period if you become unemployed and it wasn’t your fault.
• With the security account, the family member also gains interest.

Disadvantages 

• The family member is taking on the risk of you not being able to make repayments. If the bank ends up having to sale the house, the deposit will be used to cover any shortfalls. 
• Some family members may find it difficult to not be able to access their money for a long period of time especially if they have an emergency of change of circumstance
• Family members may not be particularly keen on taking on the risk without having a share of the house.
• Some banks only allow family members and not friends to assist
• The house being used as security needs to be mortgage free

My thoughts 

I think this is a great way for families to help each other get on the property ladder. This would work well if there is a proven record of good financial etiquette from the applicant and the family also gain a return on their money. It’s important to note that different banks offer different variations of the above, therefore it is wise to carry out comparisons before making a choice.

Help to buy – equity loan

Help to buy is where you raise a 5% deposit and then receive a loan from the government of up to 20% (up to 40% in London) of the value of the property. The loan from the government is interest free for the first 5 years.

How it works

When you raise 5% of the deposit and fit the application criteria, the Government will give you a loan of up to 20% of the value of the property to add to the deposit required. The mortgage required will be for 75% of the value of the property. As the bank is effectively receiving a 25% deposit and the loan is interest free for the first five years, this reduces interest charges. To qualify you need to be a first-time buyer and not own any other homes at the time of purchase. 

Advantage

• You are able to get on the property ladder with lower deposit and benefit from low interest charges.
• The loan is interest free for the first 5 years
• You don’t have to start repayments on the loan until after the first five years

Disadvantages

• The government owns part of the house and it needs to be your primary residence until you pay off the loan.
• You are not allowed to sublet the house and you are not allowed to make any structural changes without permission. 
• The scheme is only available on newly built properties
• Some developers do not support it
• If you do not repay the loan and sale the property, the % you owe the government is the same % you need to pay back. So, if the value of the property increases, when you sale it, the value you need to pay back increases

My thoughts 

Being able to raise 5% of the deposit but benefit from low interest charges is really helpful. As a first-time buyer of a newly built house, you have to raise more than the 5% and you also have to pay for other fixtures and fittings required for the house before moving in. So in reality you are saving up to about 15% of the price of the property after considering all the fees required. Having this interest free loan gives you some to flexibility in the first 5 years. 

Shared Ownership 

If you cannot afford to raise the full deposit required, this scheme will help you to purchase 25% to 75% of the property. You get a mortgage for the % you would like to buy then pay rent on the remaining %.  You will be able to purchase the full value of the property over time. This is available on both newly build properties and existing ones.

Advantages

• You are able to get on the property ladder with a smaller deposit and work towards owning the property
• Start off with small manageable chunks
• Ownership of the property can eventually increase to 100%
• This is not only open to new buyers, but people who have previously owned a property and cannot afford to buy a property.

Disadvantages

• You pay both a mortgage and rent 
• You have to earn below a certain amount to be able to qualify
• May have limited options in terms of the properties that are available for the scheme

Above are some of the schemes that can be used to aide in getting on the property ladder. They enable you to benefit from low interest charges after having raised a smaller deposit. This goes a long way in easing the financial pressure because buying a house also involves other fees on top of the deposit. 

Please speak to your financial or mortgage advisor to discuss your circumstances and the schemes that could work best for you.

By Sam

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