All news

Government Help for First-Time Buyers

What Government Help is Available for First-Time Buyers - Priestley's Estate Agents

The average cost of a house in Britain is £218,000. Property ladder hopefuls have found this to be a significant amount of money that becomes a barrier to first-time home ownership. The UK government in 2013 formed schemes to assist those buying homes for the first time up the next rung in the process. Priestley’s Estate Agents dive into what help is available from the government for first-time buyers

Do You Qualify As a First Time Home Buyer?

It is essential to understand who the term first time home buyer refers to in the context of UK government home ownership assistance. A first time home buyer, as the name suggests, is one who has never owned any property in any part of the world.

If you have ever inherited some property before it disqualifies you from being a first-time homeowner. If you happened to sell the property immediately after inheriting it (even if you did not live in it) you still do not qualify.

If you are a stated beneficiary in a will bequeathing you property in the future then you are considered a first time home buyer for as long as the person looking to give you the property is alive. Should they pass away then you automatically become disqualified.

If you had a trust or were the proprietor of a company that owned any residential property that you lived (or still live) in you also do not qualify to be a first time home buyer.

Anyone who is involved in a peer-to-peer scheme that invests in property qualifies to be a first time home buyer as long as they have not occupied the property the scheme’s invested in.

1. Starter Homes Scheme

Established in 2015 the starter homes scheme is a government plan that seeks to make housing available to UK first time home buyers. The program aims to stimulate home buying among young people and as such to qualify you must be between 23-40 years old. Qualified citizens submit their applications online to initiate the process.

The scheme will target crating 200,000 newly built homes that come with a discount of at least 20% off the market price. In London, the discounted price for the house will not exceed £450,000 while outside London it will not exceed £250,000.

Note that once you get a starter home from the scheme, you can’t rent it out at market price for five years after the initial sale. You also can’t sell it until that time.

2. Help to Buy

Help to buy was launched by the UK government in 2013 to assist first time home buyer who can’t afford more than 5% of the deposit needed to purchase a home. While it is open to both first time home buyers and those who already own residential property the vast majority of its applicants (81% according to the government) are those who never owned a home before.

How Does It Work?

When it was first introduced help to buy scheme consisted of two parts:

  • An equity loan.
  • A mortgage guarantee.

Mortgage Guarantee

The mortgage guarantee part of it was designed such that the government would guarantee up to 15% of the property to banks and building societies. The goal was to incentives them to lend bigger loans to qualified applicants. The government scrapped this segment of help to buy in 2016.

Equity Loan

Help to buy equity loan is where you provide a 5% deposit of the property’s value while the government lends you a 20% loan of the value of the property. You then borrow the remaining 75% as a mortgage from a lender. It is applicable for newly built property in England with a maximum value of £600,000, and it will be shuttered in 2021.

The government will not charge you any interest on the 20% they loan you for the first five years. In year six a 1.75% charge referred to as a loan fee sets in. From year seven onwards you pay interest based on the inflation (calculated by the Office of National Statistics) which is derived from the Retail Price Index (RPI), plus 1% in addition to the 1.75% loan fee. All your due fees can be paid as an annual lump sum or a monthly charge.

While the overarching rationale was that a mortgage of 75% is cheaper than a 95% one this may not always stand true. Seek an independent mortgage broker or a mortgage comparison platform to help you assess whether that is indeed the case.

When you decide to sell your help to buy home, the government will claw back its 20% whether it’s at a profit or loss. The same applies if you decide to keep the house at the end of the 25-year mortgage. You can decide to repay the loan in the first 25 years but it will be in minimum increments of 10% of the property’s current value.

Help to Buy London

If you desire to buy a newly built house in London or Greater London you give a similar 5% deposit and receive an interest-free government loan for the first five years but at 40% and not 20%.

Help to Buy ISA

The help to buy ISA assists first time home buyer to accumulate more savings. Every time you save £200 in the account, the government will disburse a £50 bonus. The scheme has a ceiling of £3,000 for £12,000 of savings. The bonus is tax-free and is paid directly to the mortgage lender upon completion of the house. You, therefore, can’t use it for the deposit.

Using the bonus, you can buy a home worth up to£250,000 if it’s located outside London and £450,000 if it is in London. The ISA is a cash one, and as a result, you can only pay into one such ISA per tax year.

Home ownership in the UK can be out of reach for young people and those who aren’t high net worth individuals. The government, through the formulation of several home buying schemes for first-time homeowners, seeks to empower first-time buyers to purchase their most important asset and improve their standard of living,