Getting a leg-up on the property ladder: first-time buyer options
Rising house prices isn’t exactly good news for everyone - it makes it harder for first-time buyers to get on the ladder. Fortunately, there are a few options available to help them out.
House prices have risen by more than 80% since the year 2000. That’s great news for those who already own a home but not so fantastic for the millions of people who are yet to secure their slice of the property pie. Switching from ‘Generation Rent’ to ‘Generation Buy’ has proved increasingly difficult for first-time buyers, especially if there’s no bank of mum and dad to fall back on.
Fortunately, however, the government has taken some measures to make it easier to get a foothold on the property ladder. For starters, first-time buyers don’t have to pay stamp duty land tax (SDLT) on the first £300,000 of their purchase. That’s a relief.
There are also a number of schemes and incentives that can lighten the financial load. Although you’ll find most of them on the government’s dedicated Help To Buy website, there’s an awful lot there to digest. Therefore, we’ve created a useful summary below. We’ve also discussed how private companies can help, too.
Let’s kick things off with savings before turning our attention to 5% deposit mortgages, equity loans and shared ownership.
Savings
You probably know all about Individual Savings Accounts (ISAs), which let you save tax-free, but have you heard of Lifetime Individual Savings Accounts? LISAs let you save up to £4,000 annually towards your first home. What’s more, the government will contribute up to £1,000 every year on top. Talk about a cash bonus.
LISAs can be opened by anyone aged between 18 and 39. And first-time buyers will enjoy their bountiful bonus until the age of 50; therefore it’s worth setting one up ASAP as you could technically claim up to £33,000. The only catch is that you have to use the money for a deposit, otherwise there’s a penalty.
Mortgages
You’ve usually got two options if you’re a first-time buyer struggling to get on the property ladder: either win the lottery or get a mortgage. Unsurprisingly, we’re only going to talk about mortgages here, so apologies to all you EuroMillions aspirants.
The government’s mortgage guarantee scheme is first up on the agenda. This has increased the availability of generous 95% loan-to-value mortgages that require smaller 5% deposits. This means that first-time buyers can afford their own home much sooner.
The scheme, which has effectively replaced George Osborne’s old Help To Buy plan, will be in place until the end of this year; therefore 2022 could be the time for first-time buyers to take the plunge. However, before you decide which mortgage is right for you, be aware that some mortgage providers are now offering 50-year mortgages, too. This allows you to pay back less every month over a longer period of time – great news if your finances would normally be stretched by a mortgage.
We have the Bank of England to thank for this new flexibility. They’ve deliberately relaxed mortgage rules to help first-time buyers. For example, you can now borrow more at an earlier age. Indeed, certain first-buyers can borrow up to six times their annual income.
Equity Loans
If the idea of a draughty Victorian villa doesn’t appeal, then first-time buyers can apply for a Help To Buy Equity Loan on a new-build property. It works like this: if you can’t quite afford a regular loan-to-value mortgage, the government will lend you up to 20% of the purchase price (up to 40% in London) to ease the financial burden.
This is a great option. The only conditions are that you’re aged over 18, have never bought a property in the past, and aren’t married to someone who owns (or has owned) their own home. Furthermore, although there are price limits in place – the government won’t lend you 20% of the value of Buckingham Palace – the limits vary for each region of the country. Therefore, Equity Loans are actually quite equitable.
Another option is the First Homes Scheme, which saves first-time buyers an average of £70,000 off the price of specific properties. This scheme could save you up to 30% off a home’s true value. And if you’re a key worker, you might get priority over other interested parties.
Designed to get first-time buyers on the housing ladder in the area they live and work, the First Homes initiative only applies to a limited number of properties so you’ll have to get in there fast. However, more and more homes will become available in the next 2 years. Over 100 locations have been identified to build 1,500 discounted homes.
Although there are a few more limitations to this one – you won’t qualify if your household income is over £80,000 (£90,000 in London) and there are post-discount price caps in place – it’s a great way to secure a fantastic home that might not be affordable otherwise.
Proportunity
Interestingly, equity loans are also becoming available through private companies now. Proportunity, for example, let you borrow up to 25% of a home’s purchase price (up to £150,000) with the rest of the money coming from a regular high street lender.
Proportunity loans are brilliant for first-time buyers because you’re effectively boosting your budget by £150,000. This means you can get your mitts on a bigger and better home much sooner, thus skipping a rung on the metaphorical property ladder.
The company’s proposition will also interest many first-time buyers because you can buy homes of any age. Therefore, it’s an enticing alternative to the Help To Buy options above. Maybe that Victorian villa isn’t such a bad idea after all?
Shared Ownership
The final way to climb that stairway to property heaven is shared ownership, which bridges the gap between renting and buying. How does it work? You purchase between 10-75% of a home, move in right away, and pay rent on the remaining share.
Many first-time buyers love shared ownership because you can purchase a larger share of the property in manageable slices (usually 1% increments) as your income and savings grow. Plus you won’t have the pressure of taking on an enormous debt for the whole value of a property right away.
The government seems to love the shared ownership model, too. Around half of the 180,000 homes being built under its £12 billion Affordable Homes Programme will be available to buy this way. The only restriction is that your household income must be under £80,000 (£90,000 in London) to qualify.
So what’s it going to be?
Buying your first home can be tough. But the dream might not seem so distant for first-time buyers thanks to the options above. Yes, we’re still talking about a lot of money here. And yes, the idea of a 50-year mortgage (or any other kind of debt) is bound to be intimidating for young people. However, taking that first step towards home-owning nirvana is invariably worth it.
Just ask the 65% of the UK population who have already tested the water.