Making sense of first time buyer deals

The latest deal designed to get more would-be first-time buyers into their own homes got the green light this week, with the Government promising that thousands of properties will be built on brownfield sites during 2017.

With cash from the Government’s £1.2bn Starter Homes Land Fund, which supports the development of starter homes on sites across England only, every home will be available strictly for current renters aged 23-40 and, crucially, offering a minimum 20 per cent discount on market values. The first wave of homes will be built under partnerships with 30 local authorities including Blackpool, Gloucester, Northumberland, Bristol, Plymouth, Manchester and Luton.

But as one big plan to solve the first-time buyer problem launches, so another closes – the Help to Buy Mortgage Guarantee shut up shop on 31 December after more than 86,000 successful completions since its launch in 2013.

In fact, with six different schemes now coming under the Help to Buy banner alone, those struggling to get a grip on the starter end of the UK property market are further hindered by the bewildering range of discounts, deals and cash injections available. It all seems like a haphazard series of affordable home initiatives aimed at getting new owners buying in order to support the entire, economically all-important property market.

Meanwhile, despite the latest plans for 48,000 new homes to be built in garden towns and villages near Taunton, Aylesbury and Harlow, the enduring criticism is that without the massive construction needed to deliver the 250,000 homes we’d need every year to balance supply and demand, such deals will only serve to push up prices anyway.

What’s clear is that while the Bank of Mum and Dad is continuing to plug part of the funding gap, such measures are likely to become a permanent part of the property funding landscape.

So what’s out there now? And which should you plump for if you’re hoping to get a first foot on that ladder in 2017?

Help to Buy

More than 220,000 homes have been bought under the original seven Help to Buy schemes since they were first launched in 2013, with an average purchase price of £191,000.

It may sound a lot but it is a drop in the ocean compared with the 310,000 people successfully buying their first home each year and the countless thousands that haven’t yet been able to secure a mortgage or scrape together the average £33,000 deposit needed.

Help to Buy ISA

Launched a year ago, this is a pure cash boost. The scheme allows savers to claim a government bonus of 25 per cent on monthly savings of up to £200 towards their first home. That’s the equivalent of £50 added to every £200 saved up to a maximum governmental contribution of £3,000 on £12,000 worth of savings.

It’s a very popular option, with more than 650,000 accounts opened in the first six months alone. Bizarrely though, it turns out this one may not be for you if you haven’t saved the deposit you’ll need as the Government bonus can’t be used for the deposit itself. It’ll be paid to the mortgage lender on completion instead.

Help to Buy Shared Ownership

One for households with a surprisingly high level of income (£80,000 outside London and £90,000 in the capital) but who still can’t afford to buy a property on their own, shared ownership allows would-be buyers to purchase a portion of the property – between 25 and 75 per cent of the value – and rent the rest at a maximum of 3 per cent of the remaining proportion of the property’s value.

So, for example, if a property is worth £200,000 and you managed to buy 50 per cent of it, you’d pay a maximum of £3,000 a year in rent on the rest.

Eligible properties are sold through housing associations, though they don’t necessarily need to be council houses, and there are a wide range of mortgages on offer to help you raise the funds you’ll need for your proportion (though not all lenders offer such arrangements).

You can decide to “staircase”, a strange piece of jargon which means you buy up more of the property over time. There are a few significant negatives though. All shared ownership properties are sold on a leasehold basis, typically 99 years and, crucially, shared ownership properties are in specified places so you can’t pick and choose your ideal location. However, it’s one of the few schemes which prioritise military personnel, so could be useful if there’s one in the family.

Help to Buy Equity

The thinking behind this scheme is that by using an interest-free loan, would-be buyers with little savings can still get access to the cheaper deals offered to those with larger deposits.

Buyers will need to have at least 5 per cent of the property value, with the Government stumping up a maximum of 20 per cent on top of that. The remaining cost of the property is then covered with a standard 75 per cent mortgage.

It’s a compelling option for those with strong lending prospects like a clean credit history and good income, but who haven’t been able to put away significant savings for a deposit. You’ll also need to be ambivalent about period features as this deal is only available on new builds.

You’ll need to repay the loan after 25 years, when you sell or your mortgage term finishes, whichever happens first.

Help to Buy Mortgage Guarantee

Though this scheme is now closed, that’s because the Government has decided it has achieved its main objective of encouraging lenders to offer mortgages of up to 95 per cent.

Meanwhile, Help to Buy London, Scotland and Wales all offer slightly different deals based on the same basic arrangements as those outlined above.

Starter Homes

Then there are the bids to simply build cheaper homes exclusively for first-time buyers – such as that announced this week. The only problem, as both the Opposition and housing charity Shelter have pointed out in no uncertain terms – is that a price tag of up to £450,000 in London (and £250,000 elsewhere in the country) is hardly affordable.

In fact, the number of affordable homes being built every year is now at a 24 year low, with only 3,430 constructed in 2015/16.

Lifetime ISA

From April, the newest weapon in the affordable housing arsenal will allow 18-40-year-old first-time buyers to save up to £4,000 a year into a stocks and shares or cash ISA. The Government will top up the savings by 25 per cent with the resulting pot either put towards a first home in the UK up to the value of £450,000 or taken tax-free from aged 60 as a pension.

Crucially, unlike the Help to Buy ISA, the top up can be included as part of the deposit. And the top up will be paid monthly, helping savers benefit from compound interest. Those with Help to Buy ISAs will be able to transfer their existing savings to a LISA from April, but with details of the scheme coming late, many ISA providers have expressed concerns about having a LISA product ready to launch in just a few months’ time.

Right to Buy

Finally, the best known of the lot. Right to Buy allows some council tenants to purchase their home at a significant discount – up to £103,900 for London residents or £77,900 for those outside the capital.

From April last year, applicants were required to have only three years’ tenancy, down from five years. But Scotland has now scrapped its Right to Buy scheme and Wales has plans to follow suit.

The big drawback here is that only 500,000 of the 1.3m housing association tenants are currently eligible, despite general election-focused promises to make the deal open to all such tenants.

The discount you’ll get may also vary depending on how long you’ve been a public sector tenant, whether the property is a house or flat, and its value and location.

For more information about options and eligibility, including those on offer in Scotland, Wales and Northern Ireland, go to:

www.helptobuy.gov.uk/own-your-home

www.moneyadviceservice.org.uk/en/articles/help-to-buy-homebuy-and-other-housing-schemes