Buying a first home
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There is help available for first-time buyers to get onto the housing ladder, says Derin Clark
As property prices continue to rise, many first-time buyers remain unable to get onto the housing ladder. Although it can seem like an uphill struggle for prospective homeowners to buy their first property, there are schemes available that are designed to help first-time buyers own their first home.
One such scheme is the newly launched Government mortgage guarantee scheme, which saw a number of high street lenders re-introduce mortgages available for a 5% deposit, also known as a 95% loan-to-value (LTV), during April. This scheme is designed to give mortgage lenders Government security in the event the borrower cannot keep up with mortgage repayments, but it does not offer any guarantee to the borrower should they fail to make repayments. Instead, this scheme helps first-time buyers as it encourages more lenders, who withdrew from the market during last year’s spring lockdown, to offer mortgages at a 95% LTV.
Another way first-time buyers with a small deposit can secure a mortgage is through a guarantor mortgage. A guarantor mortgage will normally require a close family member, usually a parent or grandparent, to put an asset as security against the mortgage. While these mortgages can be a good way for those with a small deposit to get a mortgage at a more competitive rate than many other 5% deposit deals on offer, it does carry the risk of the guarantor losing their asset, often their home, if the borrower is unable to keep up with mortgage repayments.
A well-known scheme that has been available for a while is the Help to Buy Equity Loan scheme. Last year, the Government relaunched this scheme so that it is now only available to first-time buyers and properties have a price cap, which varies depending on which region in England the property is located. Under the Help to Buy scheme, first-time buyers need a 5% deposit, and they can then borrow up to 20% (40% in London) of the cost of a newly built home with a Government loan. A Help to Buy mortgage from a mortgage lender is then needed to fund the remaining cost of the property. The 20% (40%) Help to Buy Government loan is interest-free for the first five years and then interest starts at 1.75% per annum and rise each year in April by the Consumer Price Index plus 2%. In addition to this, a monthly management fee of £1 is charged for the term of the loan.
Often the best, but usually the hardest, way first-time buyers to get onto the property ladder is to have a large deposit. Interest rates on mortgages with a 10% or more deposit are much more competitive than those available to buyers with just a 5% deposit. First-time buyers looking to boost their house deposit savings can consider a Lifetime ISA (LISA). A LISA allows savers to deposit up to £4,000, along with a 25% bonus, each year – which results in a maximum of £1,000 bonus on savings, plus interest, each year. The downside to a LISA is that if money is withdrawn for any other reason other than as a deposit for a first home, or other specified reasons, a hefty penalty is charged.
Derin Clark is an online reporter at moneyfacts.co.uk, the money comparison experts, specialising in personal finance