The new Your First Home scheme will help first-time buyers get on the property ladder with a smaller deposit, working in a similar way to the Help to Buy scheme, which is closed to new applicants in England and Scotland.
Announcing the scheme as he arrived in Liverpool for Labour’s annual conference, the Prime Minister said: “Too many young people are struggling with the cost of housing, with many giving up hope of ever having a home to call their own.”
“So we will step in to help more first-time buyers on to the housing ladder, especially those who can’t call on the bank of mum and dad.”
How will Your First Home work?
First-time buyers will put down a 2.5% deposit through the Your First Home scheme, then the Government will provide a loan worth 20% of the property value to help pay for the purchase. This equity loan will initially be interest-free.
Rightmove said the average property now costs £230,000 - which means a 2.5% deposit would be £5,750 and the loan would be £46,000. There will be a cap on household income and the size of the deposit to target the scheme at less well off buyers. Registration for the scheme will open at the end of the year.
In comparison, Help to Buy required a 5% deposit and the Government would lend you 20% of the property value, or 40% in London. The Help to Buy loan is interest free for the first five years - after this, for the sixth year, you begin paying interest at a starting rate of 1.75% on the original amount borrowed. Then from the seventh year, the interest rate increases every April in line with inflation.
Funding and other help for first-time buyers
Funding for the scheme is expected to come from reprioritising existing Government budgets. Housing developers will also pay towards the running costs of the scheme. Full details will be set out at the Budget on October 28 by the Chancellor John Healey.
Other help for first-time buyers includes the Lifetime ISA, where you can save up to £4,000 a year and get a free 25% cash boost from the Government - a maximum yearly bonus of £1,000. The money has to be used for your first home or for retirement, and you can open a Lifetime ISA if you are aged between 18 and 39. If you're saving for your first home, the property value cannot exceed £450,000. You'll pay a 25% penalty if you take money out for anything other than your first home or retirement. The Lifetime ISA is being replaced by a new First Time Buyer ISA.
Help to Buy ISAs closed to new savers on November 30, 2019 - but if you already have an account, you can keep saving until November 30, 2029. You can save up to £200 a month, and the Government tops up your savings with a 25% bonus. The maximum you can get free is £3,000, and you'd need to save £12,000 to get this. You must claim your bonus by December 1, 2030.
Low deposit, guarantor and shared ownership options
Many lenders now offer 5% deposit mortgages to help those who cannot afford to save a big deposit. The good part is that a smaller deposit means you will be able to buy your first home quicker, but 5% deposit mortgages typically come with higher interest rates - which means you will end up paying more overall. If local property prices drop, your home may become worth less than the remaining mortgage balance, which would make it harder to move or remortgage.
You can also get 100% mortgages, where you borrow the entire amount you need without putting down a deposit. But like a 5% deposit mortgage, these normally come with a higher interest rate and there is a risk of falling into negative equity if property prices fall.
A guarantor mortgage is a type of mortgage deal where another person agrees to take on responsibility for your repayments if you can’t pay. The guarantor is normally not named on the deeds, so they do not own a share of the property - but they become liable for the mortgage repayments if you fall behind.
Shared ownership is where you buy a share of a property - between 25% and 75% of the property value - and pay rent on the rest. The share you can buy is usually between 25% and 75% but can be as low as 10% on some homes. You can buy additional amounts under what's known as “staircasing” which is where you slowly increase the amount of the property you own. Shared ownership isn’t limited to first-time buyers, but to be eligible, you need to have an individual income no greater than £80,000 a year or £90,000 a year in London.
