This section will explore the different Government schemes available for first time buyers, such as the mortgage guarantee scheme and Shared Ownership, and provide information about the eligibility criteria for these schemes.
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Shared ownership mortgages
With the Shared Ownership scheme, you can purchase a portion of a property while paying rent on the remaining portion.
You can purchase more shares in your property through the scheme, provided you have the means to do so. Formerly, each additional share must be at a minimum of 10% of your property’s value, but as of April 2021, you can buy shares in 1% increments.
If you live outside London and your household earns £80,000 or less per year, you may be eligible for Shared Ownership. However, if you reside in London, the maximum household income increases to £90,000.
To buy a property through Shared Ownership, you must either be a first-time buyer, a previous property owner who cannot afford a new one, or already own a share in a home but wish to relocate. You will require a Shared Ownership mortgage to finance your share of the property.
Mortgage guarantee scheme
In the March 2021 Budget, the government announced the mortgage guarantee scheme to aid buyers with a small deposit to buy properties priced up to £600,000. The initiative closely resembles the previous Help to Buy mortgage guarantee scheme that concluded in 2016 and is scheduled to run until December 2022.
The scheme is available for first-time buyers and homeowners wanting to purchase a more expensive property. They only need to make a 5% deposit, and the Government guarantees to lenders if the property is repossessed or sold for less than the remaining mortgage value.
Lenders must offer a new product range with a five-year fixed interest rate. This will be helpful for buyers who want to be sure that their payments will not increase even if interest rates rise in the future.
Please be aware that certain lenders still provide mortgages for up to 95% of the property price, even without a guarantee from the Government. If you’re unsure which mortgage would be best for you, it’s recommended that you seek advice.
Help to Buy equity loan
The Help to Buy equity loan scheme, open to first time buyers with a 5% deposit, is no longer accepting new applications since 31st October 2022. Those who applied before this date have until 31st March 2023 to finalise their purchases.
The scheme suggests that instead of getting a mortgage for 95% of the property value, the Government would lend buyers 20% of the property price. Therefore, the buyers must only arrange a mortgage for the remaining 75%.
If you buy a property in London, you may be able to borrow up to 40% of the property price. This could reduce your mortgage to 55% of the total property value.
From April 2021 to March 2023, there will be a limit on the price of properties that qualify for the Help to Buy Equity Loan scheme:
North East £186,100
North West £224,400
Yorkshire and The Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
South East £437,600
South West £349,000
Source: HM Treasury
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You can obtain an interest-free Government equity loan for the first five years. After that, you will be charged a monthly interest fee of 1.75% of the equity loan. The interest rate will increase annually in April in line with the Consumer Price Index (CPI) measure of inflation plus 2%. Please note that you can use the loan for purchasing your primary residence and not for a Buy to Let property.
The rules mentioned are specifically for properties located in England. However, similar schemes were also implemented in Scotland and Northern Ireland. The Wales scheme is still accepting applications until March 31, 2023.
Help to buy equity loan repayment
Homebuyers who have used a Help to Buy Equity loan are not required to make interest payments for the first five years, and they must repay the loan when they sell the property or reach the end of the mortgage term, whichever comes first.
Paying back your Help to Buy equity loan early
Many buyers under the Help to Buy scheme may wish to pay back their equity loans early for various reasons, including the desire to fully own their property. While it’s possible to make partial or full loan repayments before the end of the five-year interest-free period, there are certain restrictions to keep in mind. Additionally, interest on the loan must be paid.
During the five-year interest-free period, you cannot make monthly payments to decrease the loan amount. Your options are either to pay the entire loan at once or make a partial repayment of at least 10% of the current property value. This process is called “staircasing.”
If your equity loan is the minimum 10% of your property value, you must pay the full 10% immediately. For an equity loan of 20% of the property value, you can choose between paying it back in two instalments of 10% each or one lump sum of 20%.
Independent Property Valuation
To determine the precise repayment amount, you must arrange for an independent surveyor to value your property first. You can locate a surveyor near your location by visiting the RICS website. Please note that you must bear the valuation cost, which will vary based on your property’s size and remain valid for only three months.
If you pay off your equity loan before it’s due, you will repurchase a portion of your property’s equity. To handle this transaction, you will need the assistance of a solicitor for conveyancing. Additionally, there may be an administration fee of approximately £200 that you will need to pay when you repay or partially repay your Help to Buy equity loan.
Frequently Asked Questions
1. What is a first-time buyer government scheme?
A first-time buyer government scheme is a form of government subsidy that helps those who are not property owners to buy a new home. There are several government schemes available, such as Lifetime ISA, Help to Buy, Right to Buy, Shared Ownership, and First Time Buyers’ Initiative. These schemes have different eligibility criteria, benefits, and limitations, such as age range, deposit amount, loan interest, and property type¹.
2. What is the First Homes scheme?
The First Homes scheme is a government initiative that gives first-time buyers the opportunity to buy their home at a 30% discount. It’s only available to first-time buyers in England buying a new property. Purchasers must also have a household income of less than £80,000 (or £90,000 in London). The scheme is designed to help people get on the housing ladder in their local area. This means that the eligibility criteria are set by the local authority and may differ².
3. What is Help to Buy?
Help to Buy is a government scheme that helps first-time buyers get on the property ladder. It provides an equity loan of up to 20% (40% in London) of the purchase price of a new-build home. The loan is interest-free for the first five years and can be repaid at any time or when you sell your home².
4. What is Shared Ownership?
Shared Ownership is a government scheme that allows you to buy a share of your home (between 25% and 75%) and pay rent on the remaining share. You can buy more shares later on if you want to own your home outright. You’ll need to take out a mortgage to pay for your share of the home’s purchase price².
5. What is Right to Buy?
Right to Buy is a government scheme that allows council tenants in England to buy their council home at a discount. You can get a discount of up to £84,200 (£112,300 in London) depending on where you live and how long you’ve been a council tenant².
6. What is Lifetime ISA?
Lifetime ISA (LISA) is a government scheme that helps people aged between 18 and 39 save for their first home or retirement. You can save up to £4,000 per year into your LISA account and receive a 25% bonus from the government on top of your savings¹.
7. What are Stamp Duty Land Tax (SDLT) rates for first-time buyers?
First-time buyers don’t have to pay Stamp Duty Land Tax (SDLT) on properties worth up to £300,000 in England and Northern Ireland. For properties worth between £300,000 and £500,000, they’ll pay SDLT at 5% on the amount above £300,000².
8. How much deposit do I need as a first-time buyer?
The amount of deposit you need as a first-time buyer depends on several factors such as the price of the property you want to buy and which government scheme you’re using. For example, if you’re using Help to Buy Equity Loan or Shared Ownership schemes, you’ll need at least 5% deposit¹.
9. How much can I borrow as a first-time buyer?
The amount you can borrow as a first-time buyer depends on several factors such as your income and credit score. Most lenders will lend up to four times your annual salary or three times your joint salary if you’re buying with someone else¹.
10. How do I apply for government schemes for first-time buyers?
You can apply for government schemes for first-time buyers through their websites or by contacting their customer service teams directly.
- First Time Buyer Government Scheme – ukmortgagehousing.co.uk. https://ukmortgagehousing.co.uk/first-time-buyer-government-scheme
- Government Home Buying Schemes – HomeOwners Alliance. https://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/government-schemes-help-buy-home