Securing a mortgage: New build homes, first-time buyers market
Schemes for first-time buyers
We know that first-time buyers are the lifeblood of the property market, but many are struggling to find the required deposit. This is just one of numerous challenges for first-time buyers, but the government and the industry have stepped forward with several supportive schemes.
While the Help to Buy scheme proved highly successful, several other schemes available today don’t receive the same level of publicity. However, the new build homes first-time buyers market is still relatively competitive – if you know where to look!
It is important to note that some of the schemes targeting the new build homes, first-time buyers market are time critical.
General market overview
As the Bank of England looks to bring inflation under control, we have seen several interest rate rises over recent months. While inflation remains stubbornly high at the moment, there are indications it is starting to weaken. The Bank of England expects the rate to be 4% at the end of 2023, while the Office for Budget Responsibility is more upbeat, suggesting a rate of 2.9%. Either way, the policy of increasing interest rates is having an impact on inflation, as is the downtrend in energy prices.
The UK base rate currently stands at 4.5%, with a consensus amongst experts that we are at or near the peak. This gives first-time buyers and others in the property market more visibility going forward and reduces the uncertainty around mortgage rates. Due to a mix of developer incentives and various schemes, the new build homes, first-time buyers market is currently providing some attractive deals.
First Homes Scheme: Discounts for first-time buyers
The First Homes Scheme offers first-time buyers the opportunity to acquire their first property at a discount of between 30% and 50% of the market value. While currently only available in England, the home must be:
- A new home built by a qualifying developer OR
- A house bought from someone who originally bought it as part of the scheme
There are also various eligibility factors to consider with this new build homes, first-time buyers focused scheme. The buyer must be:
- Aged 18 or over
- A first-time buyer
- Able to obtain a mortgage for at least 50% of the property value
- Buying as part of a household with a combined income of less than £80,000 a year (£90,000 in London)
You may also come across additional eligibility conditions with local councils prioritising:
- Essential workers
- People already living in the area
- Those on lower incomes
The scheme is supported by £150 million of government funding, which will assist developers as it is rolled out. Initial funding is expected to see 1500 first homes available nationwide by September 2023 and up to 10,000 each year once the scheme is fully operational.
It is important to note there are restrictions concerning the sale of first-home properties, remortgaging and inheritance. This ensures that the discount is protected and the homes focus on those most in need.
Find out more information about the scheme here.
The Mortgage Guarantee Scheme
The mortgage guarantee scheme was initially expected to close on 31 December 2022 but has since been extended to the end of 2023. This is a revamp of the 2013 Help to Buy: Mortgage Guarantee Scheme, which helped refloat the low deposit mortgage market after the 2007/08 financial crisis.
The borrower will still need to take an affordability test but, assuming they pass, they will have access to finance on a deposit as low as 5%.
In order to support the flow of 95% mortgages for first-time buyers and existing homeowners, lenders can purchase a guarantee from the government.
This will compensate mortgage lenders for a portion of net losses suffered in the event of a mortgage default, down to 80% of the purchase value. While the mortgage lender is still at risk to the tune of 5%, the government guarantee fills the void between a 5% deposit and a standard 20% down payment.
As of November 2022, it is estimated that the Mortgage Guarantee Scheme has helped support more than 24,000 households in their pursuit of a new home.
It is important to note that the scheme does not guarantee the borrowers’ mortgage payments, but it does underwrite a portion of potential losses for the mortgage lender. Homeowners are still liable for their mortgage payments and will be pursued accordingly if they fall into arrears.
Find out more information about the scheme here.
Lifetime ISA
The Lifetime ISA is a variation of the traditional ISA, which offers a means of maximising savings for a deposit for a first-time buyer. As well as income and capital gains being tax-free within an ISA, the government will pay a 25% bonus towards your first house purchase.
The maximum government bonus is £1000 a year if you save the maximum £4000 per annum in your Lifetime ISA. There are two types of Lifetime ISA, cash ISA and a stocks and shares ISA, which have the same tax benefits.
As you would expect, there are some conditions when it comes to the Lifetime ISA:
- Open to anyone aged between 18 and 39, saving for their first home
- Cash can be released after an initial 12-month period
- The maximum house purchase price is limited to £450,000
Interestingly, Lifetime ISAs are limited by person, not household; therefore, if you are part of a couple, you can both take out a Lifetime ISA. You can only withdraw money to put towards your first home or, if you decide not to buy a home, when you reach 60 years of age. Any other withdrawals will be hit with a 25% penalty, negating the initial government bonus. Whether you look at cash or stocks and shares ISAs, a Lifetime ISA is an interesting alternative to traditional savings.
Find out more information about the scheme here.
Shared Ownership
While many people dismiss the option of shared ownership as a means of getting on the property ladder, there are some exciting options available today. One such scheme allows you to part buy, part rent taking a stake of as little as 25% in the property. This scheme is operated in conjunction with housing associations, of which there are many up and down the country.
Some of the key points include:
- Household annual income must be less than £80,000 or £90,000 if living in London
- You will pay rent on a pro-rata basis, based on the percentage owned by the housing association
- As and when appropriate, you can invest further funds into the property, increasing your stake
- When investing additional funds, the transaction will be based on the current market value
One of the main drawbacks regarding shared ownership is that, where you need to borrow for your initial stake, you may end up paying both mortgage and rental fees each month. Consequently, it is crucial that you crunch the numbers before considering shared ownership and also have a long-term goal in mind.
In addition, as we have seen recently, private rental rates have increased significantly, which will drag the rest of the market higher in due course.
Find out more information about the scheme here.
Deposit Unlock
The Deposit Unlock scheme is a new mortgage offering inspired by the housebuilding industry in collaboration with mortgage lenders. Targeted at first-time buyers who usually need help finding a deposit (average 20%) and could potentially miss out on their first home, it has proved very popular. So how does it work?
Participating housebuilders and mortgage lenders are working together to create a package which only requires a 5% deposit from first-time buyers. New build homes , first-time buyers, the perfect combination?
Behind the scenes, the housebuilders are providing a mortgage indemnity scheme which allows mortgage lenders to offer packages up to 95% of the property’s value. In the event of losses incurred by the mortgage lenders, they will be covered by the mortgage indemnity scheme.
This is a win-win for all parties; the mortgage lenders are able to attract additional business with an element of indemnity against losses. Housebuilders can sell their properties at (hopefully) the full price, relatively quickly, to those who would not usually be able to afford them. First-time buyers can step onto the property ladder.
It is important to note that while this scheme supports 95% mortgages it still needs to be affordable based on the customer’s income. In addition, there are limits on the number of such arrangements that individual mortgage lenders can offer – controlling their overall risk.
The scheme is supported by various housebuilders, including Bellway, Barrett, Countryside Properties, Crest Nicholson, Miller Homes, Persimmon, Redrow and Taylor Wimpey.
Find out more information about the scheme here.
Conclusion
As we touched on above, the new build homes, first-time buyers market is the lifeblood of the housing market, as demonstrated by the number of support schemes over the years. In times of acute economic uncertainty, it tends to be the government that steps in with guarantees and offers for first-time buyers. Interestingly, arrangements such as the Deposit Unlock scheme are industry-driven and operated. Is this the start of a new future trend?
As a specialist mortgage broker, we have experienced the general mortgage market’s ups and downs. So if you’re planning on getting your foot on the property ladder, call us today to discuss your situation and options in more detail.
Risk warning: Your home may be repossessed if you do not keep up repayments on your mortgage.
Sources:
https://www.gov.uk/first-homes-scheme
https://www.ownyourhome.gov.uk/scheme/mortgage-guarantee-scheme/
