How to get on the property ladder

27th August 2021

Today’s property market is likely to feel a little challenging for anyone looking to buy their first home. Properties are being sold pretty quickly – some within days of them coming onto the market.

The good news is that the Government is extremely keen to increase home ownership, so they’re offering a lot of help and support. However, some of these initiatives will only last for a few years and it can be confusing to work out which scheme is right for you.

How to get a mortgage with a small deposit

In the past, most first-time buyers would have been able to save for a deposit, but high interest rates – especially in the early 1990s – meant affording the monthly mortgage payments was extremely tricky. Over time, the Nationwide UK first time buyer affordability index shows that payments as a percentage of mean take-home pay range from 30%-35% over time, but rose to more than 50% during the early 1990s.

In today’s world, with the bank base rate at just 0.1% and mortgage interest rates around 2%-3%, it’s the deposit that’s often hard to afford for first-time buyers, so this is where most of the Government help is aimed.

What schemes are available for first time buyers?

You will often read stories telling you that you need tens of thousands of pounds for a deposit or a minimum of 15% of the property’s value.

However, there are three schemes that mean you could get on the ladder with much less of your own savings than you might have thought.

Please note that there are rules on how much you can earn to access these schemes, limits on how much you can save into a scheme (e.g. the Liftetime ISA) and, because you will have an ‘additional contract’, your legal costs for buying may be a little more expensive. In addition, when you come to sell you will have to fund an independent RICS valuation of a property and this may take a little while to organise.

Lifetime ISA

The first bit of Government help is a boost to your deposit savings. If you are aged between 18 and 40, you can open a Lifetime ISA and save £4,000 a year until you are 50 and the Government will top up your savings by 25%. So, if you save the full £4,000 in the first year, you’ll get a £1,000 top up, so you will actually have £5,000 in savings.

If you’re buying a property together with someone else, you can each have a Lifetime ISA to help fund the purchase.

For more information, visit: https://www.gov.uk/lifetime-isa

Help to Buy: Equity Loan

This is a great scheme if new build properties are going up in your area. You only need to fund a 5% deposit yourself, then the Government gives you a ‘free for 5 years’ loan for the rest of the deposit – up to 40% in London and 20% in the rest of England.

Some of the benefits of this scheme:

You only take out a 75% loan to value, which can help you access lower interest rates
New builds require very little maintenance, so you can save more quickly for your next home
New builds are typically very energy efficient, so you spend less money on your utility bills.

As the scheme only runs until March 2023, it’s worth searching for properties sooner rather than later.

Speak to our mortgage advisors at Mortgage Scout to find out how much you could borrow and spend on a new build in your area.

Shared Ownership: part buy, part rent

This can be a great scheme for anyone who needs to live in a particular area where it’s difficult to afford a property or where you might be able to afford a one bed flat, but have children so need a bigger property.

There are three parts to shared ownership:

The deposit required can be a fraction of what you would normally pay when buying a home, as you’re only buying part of the property – typically anywhere from 10% to 75%
You secure a mortgage to finance the rest of the share of the property you’re buying
You pay rent on the part of the property you don’t own.

It’s important to check with the individual housing association how much it will cost you to purchase, but here’s an example of how it works:

Property’s value: £300,000

Share of ownership offered: 25% (value: £75,000)

Deposit would be 5% of £75,000: £3,750

(Don’t forget the government will top up your deposit savings by 25% with a Lifetime ISA!)

Repayment mortgage @4% interest over 25 years: £71,250 / £376 per month (estimate)

Annual rent – typically 3% of the balance (£225,000): £562.50 per month

When you come to sell, if the property has increased in value, you will receive your share, relative to the portion you own. For example, if it’s worth £50,000 more, you’ll get £12,500 (minus your sales costs).

Sources: https://www.sharetobuy.com/guides-and-faqs/shared-ownership-the-costs/ / https://www.ownyourhome.gov.uk/scheme/shared-ownership/

Other options for first time buyers

5% mortgage loans

To help ensure first time buyers with small deposits can still purchase a home, some lenders allow you to buy a property with a 95% mortgage.

It’s important to understand that this is a good scheme for those that can afford a property with a 95% mortgage, but be aware that the Government support protects your lender, not you!

Coming soon: First homes

This is a scheme designed to permanently help local first-time buyers and key workers and help you on the ladder if you can’t afford 100% of a property locally, even with schemes such as Help to Buy. Newly built properties will be offered at discount of 30% (and up to 50% in some areas) versus the market price. When you sell, the property will be sold at the same discount versus the market price at the time, to ensure the continuing benefit of the scheme. You can find more information at Own Your Home.

If you’re a first time buyer and don’t know where to start when it comes to mortgages, deposits, and Government schemes, our friendly experts can help. Check out the Mortgage Scout website and book an appointment with one of our advisors who will be happy to support you to take that first exciting step onto the property ladder!