In this helpful guide, we consider what government help is available for first time buyers.
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Government help for first time buyers
There are several schemes available across the UK to help first time buyers. However, as these schemes vary between the devolved administrations, I have considered only those applicable in England.
Mortgage Guarantee Scheme
The Mortgage Guarantee Scheme, which was announced in the March 2021 Budget, applies to new mortgage applications made between 1st April 2021 and 31st December 2022. The scheme involves the government ‘guaranteeing’ 95% mortgages for buyers with a 5% deposit. The aim was to encourage lenders to start offering 95% mortgage deals again after most were withdrawn during the pandemic.
The scheme provides a government guarantee of the portion of the mortgage over 80%. This means the government partially compensates the lender if a homeowner defaults. In essence, it provides the lender with the same level of security as they would have if the borrower had a deposit of 20%.
More information is available on the government’s website.
Lifetime Individual Savings Account (LISA)
You can use a Lifetime ISA either to save for later life or to buy your first home, as long as the property purchase price does not exceed £450,000. To open a LISA, you must be aged between 18 and 39. You may save up to £4,000 a year until you are 50 and must make your first payment into the LISA before you are 40. You will be penalised for taking money out of a LISA if you are not putting it towards a house deposit or you are under 60.
The big incentive of a LISA is that the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
If you’re buying a property with another first-time buyer who also has a LISA, both of you can use your LISA towards the property.
Help to Buy ISA
Help to Buy ISAs are no longer available to new applicants. But if you opened one before December 2019, you can still use it for a house deposit as long as you buy before December 2030 and provided the purchase price of the property does not exceed £250,000 (£450,000 in London). Like a Lifetime ISA, a Help to Buy ISA pays a 25% bonus on your savings, but limits you to saving £200 a month, instead of £4,000 a year in a LISA.
Help to Buy: Equity Loan
This is available to first-time buyers looking to buy a ‘new build’ home within a specified regional price cap. For example, in the South West where I practice, the maximum purchase price is £349,000. The property must be your main residence and the equity loan cannot be used towards a second home or a buy-to-let property. You will require a deposit of at least 5% and have arranged a repayment mortgage of at least 25% of the purchase price.
You can then take out an equity loan to cover between 5% and 20% of the purchase price. That rises to 40% if the property is in London.
The equity loan is interest-free for the first five years. You begin to pay interest from year six on the equity loan amount you borrowed. From year six, you will be charged interest at a rate of 1.75% on the amount of the loan, spread over the year in monthly payments. The interest rate increases each year in April by adding the Consumer Price Index plus 2%.
Note that equity loan payments are interest only, so you will not reduce the capital. You can repay all or part of your loan at any time. However, the minimum repayment you can make is 10% of the property’s market value, so a valuation report from a chartered surveyor is required.
More information about equity loans is available on the government’s website.
If you cannot afford all the deposit and mortgage payments on a home that meets your requirements, you may be able to buy a property through the shared ownership scheme. This is where you buy a share of the property and pay rent to a landlord on the balance. In most cases, ground rent and service charges will also be payable. Your landlord will usually be a local authority or a housing association.
Typically, you will buy a share of between 25% and 75%, although it can sometimes be as low as 10%. As time goes by, you can increase the share you own, with a corresponding reduction in rent.
Older People’s Shared Ownership
If you are 55 or over, there is another shared ownership scheme, Older People’s Shared Ownership. It works in the exactly the same way as the general shared ownership scheme, with two exceptions:
- You can only buy up to a 75% share of your home.
- Once you own a 75% share, you will not have to pay rent on the balance.
Further information is available on the government’s Own Your Home website.
People with disabilities
The Home Ownership for People with Long-Term Disabilities (HOLD) scheme can help eligible people buy any home on a shared ownership basis. Just as with the more general shared ownership scheme, you can acquire anywhere between 10% and 75% of the property’s value, paying rent on the balance.
However, you can only apply under the HOLD scheme if the properties available in other shared ownership schemes do not meet your needs. For example, perhaps you require a ground-floor property. To be eligible for HOLD, you must have a long-term disability and your household income must not exceed £80,000 a year if you live outside London, or £90,000 a year if you live in London. In addition, you must be:
- a first-time buyer; or
- a former homeowner but cannot afford to buy one now, or
- are an existing shared owner who is looking to move.
For further information, see the government’s factbook on the HOLD scheme.
Right to Buy and Right to Acquire
If you are a tenant in the public sector, you may be allowed to buy your home at a discount under the Right to Buy scheme if:
- it’s your only or main home; and
- it’s self-contained, and
- you are a secure tenant, and
- you have had a public sector landlord for at least 3 years (it does not have to be 3 consecutive years).
The maximum discount applicable is:
- £112,800 in London.
- £84,600 for the rest of England.
However, if you sell your home within five years, you will have to repay your total discount, or some of it, plus a share of any profit.
The Right to Acquire scheme is for tenants of housing associations who do not qualify for the Right to Buy scheme.
The eligibility and other rules applicable to both schemes are complex, and you should research them thoroughly.