Living with mum and dad? In digs?
With the current economic climate and the rising house prices, the number of young people still living with their parents into their late 30s is likely to increase as it gets harder to get on the first rung of the property ladder. Others are paying rent, also in the belief that they can’t afford to buy a place of their own.
Want to buy?
Even if you have given up hope of being able to buy without a substantial contribution from your parents, it’s worth investigating the various Low Cost Home Ownership (LCHO) and Affordable Housing schemes that exist. These can even work out cheaper than renting, and, being government backed, they have a good level of security. Affordable Housing initiatives have been deemed to be the new ‘bank of mum and dad’, helping people who do not have a large deposit onto the property ladder.
There are many schemes, and they have different eligibility criteria and terms, and cover different types of property, so it can be confusing.
Three main types
The three main type of home ownership schemes available are:
- Help to Buy
- Shared Ownership
- NewBuy
Help to Buy
Help to Buy is a government scheme that permits people without a 10% minimum deposit to purchase a home. There are two aspects of the Help to Buy scheme, Equity Loans and the Mortgage Guarantee.
To be eligible for both the Equity Loan and the Mortgage Guarantee, there are certain criteria that you must meet, including having at least a 5% deposit, not selecting a property to purchase that exceeds £600,000 in value or purchasing the property as a buy-to-let or second home – it must be your place of residency.
Equity Loan
Equity Loans, which were introduced as part of the Help to Buy scheme in April 2013, are available on new build homes across England. The property you purchase must be from a registered Help to Buy builder.
Under the Equity Loan, rather than getting a loan for a given amount of money, the government will lend you up to 20% of the property’s value independent of your mortgage, so if you paid 5% of the value for the deposit you would need a mortgage of 75%.
Payments begin on the Equity Loan after 5 years of purchasing the property, but in the sixth year you will incur a fee of 1.75% of the loan’s value, with the fee increasing each year by inflation plus 1%. The fees are not included in the amount you have paid off the loan.
You can pay back some (10% of market value minimum) or all of the Equity Loan early if you choose, however, it must be paid back in full after 25 years or when you sell your home – whichever occurs first. Be sure to note that the amount you pay back on your Equity Loan will depend on the market value of the property at the time you have to pay off the Equity Loan, so if you took out an Equity Loan of 20% on a £200,000 property (£40,000) and, when you come to sell it is worth £250,000, you will pay back £50,000: 20% of how much the property is worth when sold.
Note also that some property developers have their own equity loan schemes – it is worth approaching them directly for more details as they will be outside the Help to Buy scheme.
Mortgage Guarantee
The Mortgage Guarantee also allows people to buy a property with a minimum deposit of 5% but, unlike the Equity Loan, is not limited to new build properties. Under the Mortgage Guarantee, lenders allow you to borrow up to 95% of the property’s purchase price as a mortgage, as the government are guaranteeing 15% of the mortgage for seven years.
The Mortgage Guarantee can’t be used in conjunction with a shared ownership or shared equity purchase, or with any other publically funded mortgage schemes.
To find out more about Help to Buy, take a look at our article, ‘What is the Help to Buy Scheme’ for additional information about this Affordable Housing scheme. You could also contact the Help to Buy agent in your area to provide advice about the options available and throughout the Help to Buy process. You can find your local Help to Buy agent here.
Shared ownership
This scheme, as with the Equity Loan aspect of the Help to Buy scheme, covers certain new build homes in England. Shared Ownership schemes are provided through housing associations. Your local Help to Buy agent can also help you with the Shared Ownership scheme.
In the Shared Ownership scheme, you can buy a smaller proportion of the home (25-75%), and pay rent on the remaining proportion owned by the housing association. These homes are leasehold, which means that you own them for a fixed period, usually 99 years.
There are certain eligibility standards that you must meet to be able to buy a home through Shared Ownership, such as, your household earns £60,000 a year or less, you are a first time buyer or, if you have previously owned a home, cannot afford to buy a house now.
As with Equity Loans, you can increase your stake in the property by buying some or the entire outstanding share at the current value of the property – this is known as staircasing. Should you choose to sell the property, the housing association has certain rights e.g. first refusal.
Note that, in addition, there are similar schemes for properties that have been bought through Shared Ownership in the past and are now being sold – you buy the homeowner’s share from them and pay subsidised rent on the remainder.
NewBuy
NewBuy, as with the other Affordable Housing schemes, allows you to buy a home with a 5% deposit. If your mortgage lender approves your application, your mortgage will be for up to 95% of the purchase price.
Through NewBuy, your new home must be a newly built property, built by a builder taking part in the scheme and priced at £500,000 or less, that is being sold for the first time. NewBuy cannot be used to buy a second home or a buy-to-let property, and must not be purchased through the Shared Ownership scheme.
Who can apply?
Although the Affordable Housing schemes are designed to help first time buyers, they are not limited to those who have never owned a home. You may be eligible if you have previously owned a home but now cannot afford to do so or if your home is too small but you can’t afford anywhere larger.
While the intention is to help key workers (nurses etc.) to own homes they could not otherwise afford, you do not need to be a key worker to benefit. You will need to have a good credit rating, not be in rent arrears, and (usually) have enough money saved for the deposit on the property as well as the various other costs (conveyancing, house removals etc.) associated with your move.
Council and housing association tenants
If you rent a council or housing association property then you may be eligible for additional schemes to allow you to buy the place or a share of it at a discount, through Right to Buy or Social HomeBuy. Certain restrictions apply, see gov.uk for details. Further information can be found in our Right to Buy Guide.
Helping hand
Although there is information available and the Help to Buy agents will help, the finances (including tax and benefit implications) can be complex and confusing. You will need to talk to an IFA (independent financial advisor) for advice on finding the right mortgage, and find a conveyancing solicitor to guide you through the complex legal aspects that come with an Affordable Housing purchase.
June 2014.