The final countdown is on for Help to Buy as applications close next month
(Picture: Alamy Stock Photo)This Halloween is shaping up to be short on the treats for London’s first-time buyers — the Help to Buy scheme, which has given buyers a leg-up onto the housing ladder since 2013, is ending and the deadline to reserve a home is October 31.
To date some 350,000 households have used the scheme to buy a new home with only a five per cent deposit. A government equity loan of up to 40 per cent of the total value of the property, and a conventional mortgage cover the remainder.
There is no sign that the Government has plans to replace its flagship scheme with an alternative for first-time buyers — although things are, ahem, moving quickly in Westminster right now.
But as Help to Buy enters its final countdown there are some other options available to first-time buyers keen to get onto the property ladder.
Buy for up to £625,000
The stamp duty changes unveiled in Kwasi Kwarteng’s mini-Budget and effective from last Friday, will have the biggest impact on London first-time buyers’ spending power. The new lower threshold at which first-time buyers will start to pay the tax has been raised from £300,000 to £425,000, saving them £6,250.
Meanwhile the price cap at which a property qualifies for the tax cut has been raised from £500,000 to £625,000, creating a maximum potential saving of £11,250. Non first-time buyers will save a maximum of £2,500.
London and the South-East’s high house prices mean the new bands stand to benefit buyers in the capital and commuter belt the most. It remains to be seen how quickly the tax saving gets swallowed up by rising property values and steadily climbing interest rates, but in the immediate term, the tax cut could add a few thousand pounds to your deposit savings.
Small deposit, larger mortgages
At the start of the pandemic, the number of 95 per cent mortgages on offer fell off a cliff. But now, says Ray Boulger, senior technical director at independent mortgage brokers John Charcol, they are back and that’s good news for buyers with small deposits but big incomes.
Although the idea of borrowing huge sums can be alarming, especially in the current climate of rising interest rates, Boulger feels bricks and mortar are a safe bet over the medium to long term.
“Obviously the risk is that the property will decline in value,” he said. “But if you spend approximately the same amount [on mortgage repayments] as you would spend on rent then you are not out of pocket. And you will have paid some of the mortgage off by the time you want to sell, then the risks of negative equity are slight.”
Although the idea of borrowing huge sums can be alarming, bricks and mortar are still a safe bet
Bigger risks, said Boulger, are job loss or a relationship breakdown that could force the sale of a property before prices rise enough to at least cover your costs, so think carefully about how secure your life is.
Back in the Nineties, banks would routinely offer to lend buyers many times their annual salary to buy a house.
Today most banks will lend up to a maximum of 4.49 times your household income for a mortgage. This isn’t a massive help in London, where the average property price is £535,000 and the average salary just over £55,000, according to Halifax — an average earner would need to borrow 10 times their salary to buy a typical home.
If you need just a little extra, then Boulger suggests looking at Kensington’s Flexi Fixed for Term product (kensingtonmortgages.co.uk). This product allows you to borrow six times your income over a 30-year term, at an interest rate of just over four per cent.
You will have to pay fees if you want to remortgage, but not if you sell the property, so it could be a good leg-up option.
The other option for buyers is mortgages spread out over longer than the traditional 25 years — some products are spread over 40 years. This means paying more interest over the life of the mortgage, but monthly repayments will be lower, which could help out when banks are calculating how big a mortgage you are able to repay. “And it is not as though you are actually going to be staying there for 40 years and paying all that interest,” points out Boulger.
Shared ownership
Normally run by housing associations, shared ownership works by allowing you to buy a share of a property (usually between 25 and 75 per cent). This means your mortgage and deposit requirements are much less than if you were buying the whole home. The association owns the section of the property you don’t buy, and you pay it a monthly rent for the use of it. You will also have to pay the — full — service charge.
It’s worth considering because you stay in the property as long as you like, do what you want with it and have the option of increasing your share over time. And when you sell, you get a share of any profits.
Moving into our home has been a dream and shared ownership has allowed us to buy in an amazing location
LeAnn and Gustavo Ferry used shared ownership to buy a two-bedroom flat at Windsor Apartments (windsorapartments-sw11.co.uk) set between Battersea Park and Battersea Power Station, and its new Northern line Tube station. They moved in last December with their dog, Myko.
The couple opted to buy a 25 per cent share and dipped into their savings to put down a 15 per cent deposit.
Two-bedroom flats at the development have a full market value of £845,000, so a 25 per cent share would cost £211,250. This would mean putting down a deposit of just over £10,000. As well as mortgage repayments, buyers must budget for rent of £665pcm and service charge of just over £200pcm.
“Moving into our new home has been an absolute dream and the shared ownership scheme has allowed us to buy in this amazing location,” says LeAnn, an office manager.
To find out about shared ownership opportunities see: sharetobuy.com and check on the property portals.
First homes
Lower-key than Help to Buy, the government-approved First Homes scheme allows developers to offer 30 to 50 per cent discounts to first-time buyers with a household income of less than £90,000 (in London; elsewhere the limit is £80,000). Local councils have the power to ringfence schemes to prioritise key workers, those on low incomes, or people already living in the area.
Homes can only be resold to another first-time buyer, who will get the same percentage discount, which will reduce buyer demand and thus your potential for profit.
The price caps are not generous — eligibility is limited to properties costing up to £250,000 in England, or £420,000 in London.
But it does mean that a first-time buyer could effectively pay between £200,000 and £280,000 for a £400,000 property, cutting their deposit requirements and the size of their mortgage payments.
The scheme only launched last summer, and so far the range of participating developments is limited — with nothing on offer in London itself. But as Help to Buy winds up, this is likely to change, and the choice of lenders offering First Homes mortgages will also improve.
Lucy Ellis, associate director in JLL’s residential London development team, said the scheme had proved “hugely popular” at the Garrison Point development in Chatham, Kent. “In recent reservations we have seen more buyers using the First Homes Initiative than Help to Buy despite both being available,” she said.
Full prices at Garrison Point start at £210,000 for a one-bedroom flat, with discounts of up to 30 per cent available, which brings that price down to £147,000.
Not everyone is a fan of the First Homes concept. Councils can opt in or out and Camden council has already turned its back on First Homes developments, saying there is more urgent need for affordable rental properties. Homeless charity Shelter agrees. It calculates that “only the richest 28 per cent of private rental households” will be able to afford to make use of First Homes. Everyone else will miss out.
For information on how First Homes works see: gov.uk/first-homes-scheme
Private companies
Tembo has launched the Income Boost Scheme, which allows buyers to include up to four people on their mortgage, letting them rope in family members to apply for a mortgage with them. By adding the joint applicants’ incomes together, the buyer’s borrowing power is upped (tembomoney.com)
Then there is Wayhome, which describes itself as a “gradual homeownership” scheme. Similar to shared ownership you buy the proportion of the property you can afford. Wayhome’s funding partners buy the rest, so there is no need for a mortgage. You then rent the part of the property you don’t own back from Wayhome and can up your share over time (wayhome.co.uk).
Proportunity (proportunity.com) promises to boost your buying budget by up to £150,000 by giving buyers who have a five per cent deposit an equity loan of 10 to 25 per cent to bridge the gap between the home they want and the money they can raise. Unlike Help to Buy, buyers have to pay interest on the loan given by Proportunity from day one but the scheme includes resale as well as new build homes, which means you might end up spending less.
Even, which is an offshoot of the Nested online estate agent, also offers buyers equity loans of up to £100,000 to boost their deposit if they want to buy a resale property. When they come to sell, however, they must split any proceeds (joineven.com).
Most of these schemes are in their very early stages. And it is crucial to read the small print, particularly interest rates, rent levels and how profits are divided — because none is offering to help out of sheer human kindness.
Deposit unlock
Housebuilders have come to rely on Help to Buy to shift their properties; according to research from Savills about one in three new homes are sold using the scheme.
To try to ease the pain of its wind-up, a consortium of some of the UK’s biggest builders has come up with its own alternative, Deposit Unlock.
The scheme is based on the premise that banks have traditionally been nervous of giving 95 per cent mortgages on new homes on the basis that, like new cars, they lose value the second they are no longer box-fresh.
The Deposit Unlock scheme aims to resolve this problem by indemnifying loans, shielding lenders from any potential loss.
On the downside, only a couple of lenders have signed up to the scheme, and it is only available on selected plots from participating house builders, but if it proves popular it has some potential to grow.
