Despite a challenging market, the number of first-time buyers continued to increase in 2022 with a 5% increase in people buying their first property compared to the pre- covid year of 2019.
However, with the Help to Buy scheme ending in 2023, the number of people able to purchase their first property looks to reduce. As a result, in this column, we look to explore some of the alternative strategies out there to support first-time buyers in purchasing their first home.
Mortgage Guarantee scheme
Originally due to finish at the end of 2022, the government has now extended this scheme until December 2023. The scheme offers lenders the option to purchase a guarantee on mortgages where the buyer only intends to use a 5% deposit. There are specific mortgage products available for this.
The buyer has full ownership of the property and can purchase using a smaller deposit. The government offers the lender a guarantee for some of the costs suffered in the event of repossession, which enables them to lend at a higher loan-to-value.
The scheme is eligible for first-time buyers (as well as people looking to move home) up to £570,000 for a house or £275,000 for a flat but is not applicable for new build properties.
First Home Scheme
The First Home Scheme is another government scheme allowing first-time buyers to purchase a home for 30-50% less than the market value. Only certain new build developments have the funding for the scheme so you would need to explore the area where you wish to purchase to establish if the scheme is available.
The homes cannot cost more than £420,000 in London, or £250,000 anywhere else in England after the discount has been applied. Local authorities may prioritise key workers or those living in the local area if the funding is available for the scheme. The percentage discount will be passed on with the sale of the property to any future first-time buyers, which means that homes will always be sold below market value.
The scheme is only available in England and there are specific mortgage products available for the scheme.
Shared ownership is a long-term government scheme which remains available to first-time buyers on leasehold properties only. The scheme involves purchasing a share which can be a minimum of 5% but usually is between 25%-75%. A mortgage is obtained for the share with only a small deposit usually being required. The remaining share of the property owned by the housing provider also results in rent being paid as well as your mortgage payment.
Shared ownership allows the property to be purchased via ownership of a smaller share but also enables you to purchase a larger share in future which is known as “staircasing”.
“Deposit Unlock” mortgage products
“Deposit Unlock” mortgage products are only available with a selection of lenders. The products were created in collaboration with lenders and a selection of home builders.
It provides buyers with the opportunity to buy their first home (and those moving home) with a 5% deposit using a specific mortgage product, which is currently competitively priced.
The scheme was developed by the Home Builders Federation and the maximum loan allowed for the scheme is £750,000. However, it is slightly restrictive given that there are only several lenders supporting the scheme.
Private shared equity loans
With the Help to Buy equity loan scheme ending this year, there are several private equity loan schemes available which allow people to purchase their first property with 5% deposit.
There are schemes through companies such as Even and Proportunity that offer equity loans like the Help to Buy scheme. The equity loans are interest-free like the Help to Buy equity loan, however, they will often insist that the loans are paid back in instalments from the point of completion. This differs from the Help to Buy Loan where there is a grace period of five years. Equally, like the Help to Buy scheme whereby the government retains a share of any growth when the property is sold, private equity loan companies will do the same but usually at a higher percentage share.
Joint borrower sole proprietor mortgages
The “bank of mum and dad” is a phrase more commonly used in the media, particularly in recent years. Family assistance with obtaining a mortgage has often been restricted to parents “gifting” their children a deposit to help with the purchase.
However, in recent years we have seen that first-time buyers now have the savings to complete the purchase but struggle when it comes to lender’s affordability criteria. Particularly at a time when the cost of living is rising. First-time buyers have been able to utilise savings vehicles such as the Help to Buy ISA and Lifetime ISAs where bonuses are available to boost savings amounts. It is a frustrating scenario for first-time buyers when they reach the point of being able to purchase a property based on their level of deposit but fall at the final hurdle with affordability assessments.
Joint borrower sole proprietor mortgages have increased drastically over recent years. Most lenders (although not all) will insist on the “joint borrower” being a close
relative usually in the scenario of parents helping their children. The mortgage allows a parent to be added to the mortgage, their income to be utilised (whilst outgoings also factored in) but not to live at the property nor are they required to be on the deeds. Ultimately, this allows the buyer to utilise an additional source of income for affordability and prevents the “joint borrower” from incurring additional property stamp duty costs.
There are many strategies for first-time buyers available. Given the variety and complexity of these, speak to a whole market, experienced mortgage adviser.
Tom Woodall MSc CeMAP DipFA (Independent Financial Adviser – Prosperity Wealth)
Tom has a master’s degree from the University of Nottingham and is an experienced adviser in the field of mortgages and protection. He has delivered “whole of market” advice to clients specialising in cases with complex income and difficult credit profiles. He has
consistently managed a large caseload of clients juggling the different challenges as they arise! Tom has experience of advising on a wide range of
transactions including residential, buy-to-let and commercial finance.