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Help to buy
It can be frustrating to see the pros of purchase, but feel like it’s out of reach. But don’t despair, there are a few things you might be able to do if your borrowing potential is limited.
Need some help to buy?
There are lots of benefits to getting your foot on the property ladder, from not having to pay rent to a landlord every month, to having the freedom to renovate, to the hope that your property will increase in value and you’ll make some money when you sell. There are a few reasons why you may need some help to buy, so whether your deposit is less than the 10% ideal minimum, or your salary is irregular or on the smaller side, let’s consider some options that could propel you onto the property ladder faster than you thought. Help to Buy was a government scheme set up in 2013 by the then Chancellor George Osbourne, with the hope of revitalising a cold, sluggish property market. The scheme offered an equity loan where the government lent first-time buyers in England money to buy a newly built home.The scheme ensured first-time buyers could get a property with just a 5% deposit. You could borrow 20% of the purchase price (40% in London), interest-free for five years, after which point you have to pay an yearly fee of 1.75% on the outstanding loan. The scheme went on for 10 years, and all purchases in the scheme had to be completed by 31st March 2023. The Government's 'Help to Buy Scheme' - what happened there then?
In practice, the idea was good, allowing lots of people to buy a house when they might otherwise not have been able to. But experts argue now that it massively inflated the market, inflating house-builders’ profits and leaving many buyers in negative equity. There’s now pressure on the government to increase housing supply in different ways, specifically directly through local authority and housing association building projects.
So, Help to Buy is no more. What should I opt for instead?
Don’t worry, you’ve still got some options that could open some doors for you (figuratively and literally: hopefully you’ll be opening your very own front door in no time…) Your options include: Shared ownership First Homes schemes Lifetime ISA Help to Build equity loan No deposit or guarantor deposit Let’s look into these options in more detail, to see if any of them could work for you.
Shared Ownership
If you’re looking to buy a house but your borrowing potential feels limited, you may be able to get financial help from the government, through various Affordable Housing schemes. One of these schemes is based on a “shared ownership” basis. Buying a house through shared ownership is a good option if you cannot afford the whole deposit or monthly mortgage repayments on a home that you want to buy. Who are you sharing ownership with? Not just any Tom, Dick or Harry - you’ll be buying part of the property, then paying rent to a landlord on the rest. How can I share the ownership? In order to buy a share in a property, you’ll need to be able to purchase between 10% and 75% of the full house. You will also need to pay rent to the landlord for the part of the house that they own, which will be between 90% and 25%. If the property has ground rent and service charges (which will be particularly relevant if you’re buying a flat in a shared building), then you’ll be responsible for paying that too. You will also have to repay your mortgage on the share that you own. How much will your landlord charge for rent? It varies, and it is up to the landlord - but don’t worry, there are limits to how much rent you can be charged by the landlord. It is usually below-the-market rent, which is another bonus of the Shared Ownership scheme. If you buy a new-build with the shared ownership, the maximum you’ll be charged is 3% of the value of the share the landlord owns. Most landlords charge 2.75%
An example of how it would work could look a bit like this: The house cost £286,000 in total, which was the average house price in the UK in April 2023 You own 30% of the house, which would have cost you £85,800 The landlord owns 70% of the house, which is equal to £200,200 The landlord is using the UK average rental rate of 2.75% of their share of the house, which would mean your rent would be £5505.50 for the first year Your monthly rent would then be £458.79
But remember, you can buy a bigger share in the house which would reduce your rent.
First Homes schemes
If you’re a first-time buyer, you may be able to get access to the First Homes scheme. This government scheme was initially started in 2021 in the West Midlands, and will continue to spread throughout the country on a case-by-case basis. It will allow some prospective owners to buy a new-build home for 30% - 50% less than market value. The home itself has to fit certain criteria in order to be eligible for the scheme, like being a new home built by a developer, or a home you buy from someone who originally bought it as part of the scheme. If the homeowner decides to sell, then it will be valued and sold through an estate agent, and then scheme discount will be reapplied. This is a celebrated aspect of the scheme, because the idea is that the homes will always be sold below the market price, which will value ongoing generations of first-time buyers. You as the buyer will also have to fit some requirements. As a minimum you have to be: A first-time buyer 18 or older Able to get a mortgage for at least half the price of the home (so if the house was £250,000, you’d have to be able to get a mortgage for £125,000, which would mean probably having a deposit of at least 10% of that) The buyers’ total income is no more than £80,000 (or £90,000 if you live in London) It’s also up to the local council’s discretion whether they give priority to some people, like: Lower income families Essential workers People who already live, or have historically live, in the area If you think you’re eligible and interested in the First Homes scheme, you can look for new homes in your area that are advertised by developers as part of the initiative. They will help you to complete the application, then you’ll pay a fee as (which is returned if your application is unsuccessful).
If your application is successful, you’ll follow these steps: Hire a lawyer Apply for your mortgage Be led by the local council in relation to instructions and legal documentation, all of which your conveyancer will help with After your mortgage offer comes through and you have a contract set with your developer, your conveyancer will run both past the local council if you can exchange contracts. If it’s accepted by the conveyancer, then you should be able to exchange and complete as is standard. For more details about buying and selling with the First Homes scheme, as well as letting out and inheritance, you can check out the government website.
Lifetime ISA
A Lifetime ISA (Individual Savings Account) is a type of savings account available in the UK that comes with certain tax benefits. It is designed to help individuals save money for either their first home purchase or for retirement. Eligibility To open a Lifetime ISA, you must be a UK resident aged 18 to 39 years old. You can open and contribute to a Lifetime ISA until you reach the age of 50. Savings Limit In a Lifetime ISA, you can save up to £4,000 per tax year (April 6 to April 5) either as a lump sum or through multiple contributions. Government Bonus The UK government adds a 25% bonus on top of your contributions each tax year. This means if you save the maximum £4,000, you would receive a government bonus of £1,000, making the total savings for the year £5,000. How could it help me buy a house? The money saved in a Lifetime ISA can be used for two specific purposes without incurring any penalty. Firstly, you can use it to withdraw money tax-free after the age of 60 for retirement purposes. Secondly (and what we’re interested in here) you can use the ISA to buy your first home. If you withdraw the money for other reasons, there will be a penalty and you will lose the government bonus as well.
Different investment options A Lifetime ISA can be held in either a cash version or a stocks and shares version. The cash version functions like a regular savings account with interest, while the stocks and shares version allows you to invest in the stock market, potentially offering higher returns but also carrying higher risks. How does it work with tax? The money you contribute to a Lifetime ISA is not eligible for tax relief like traditional pension contributions, but any growth or interest earned within the account is tax-free. So you’ll only pay tax on the money you put in, rather than anything you earn as a result of your savings. Interested in a Lifetime ISA for buying your first home?
If you think a Lifetime ISA could work for you, there are some criteria that you’ll have to comply with: You must be buying with a mortgage The property must cost £450,000 or less You buy the property at least 12 months after you make your first payment into the Lifetime ISA You have to use a conveyancer or solicitor to represent you in the purchase - the ISA provider will pay the funds directly to them
Several banks and building societies offer Lifetime ISAs, once you’ve chosen the one that you’re interested in, it’s usually fairly easy to apply online. You can compare Lifetime ISAs online, in order to pick an account that works best for you.
A Help to Build equity loan
If you’re building (or hiring someone to build) your property, you might qualify for a loan from the government to help cover part of the cost. This is called a Help to Build equity loan. What can the loan cover? The government-backed loan can only be used for specific things relating to building a house, which includes: Buying land to build a property on Demolishing an existing property (commercial or residential) in order to build a new home Building a flat in an ‘airspace development’, which is the name for new properties built in unused space, like above existing buildings Converting a commercial building into a residential property Building a ‘custom shell home’, which is a structure designed by you and pre-built by a professional You cannot use the loan for lots of things (i.e. for a football season ticket). Things you can’t use the loan for include: Upgrading or renovating your existing home Building more than one home Building a second home, like a holiday home that won’t be your primary residence I would qualify for a loan like this, but how much could I borrow? You can apply for between 5% and 20% of the estimated cost of the land and/or building/demolishing costs. If you’re building in London, then that amount goes up to 40%, because London is a much more expensive area to build than the rest of the UK.
You can only receive a loan from the government towards building a house if you are also able to get a mortgage for the home you want to build. If you’re building a house, then you’ll be getting a self-build mortgage, rather than a conventional mortgage. Payments for this mortgage are typically made to the building-party in 5 or 6 instalments, as a percentage of what the total project is valued at. You would probably need to fund the remaining amount required to complete the build out-of-pocket.
No deposit or guarantor deposit options
If you believe that you have the money to make your monthly mortgage repayments, but you just don’t have the lump of cash to act as your deposit - what are your options? Well, one thing to explore is the no deposit mortgage route. Yep, you read that right: a full mortgage with no down payment. These types of mortgages used to be much more common and now most lenders prefer a minimum of a 10% deposit, with 20% unlocking better deals and a 40% deposit getting you the best products on the market. But Skipton has broken the mould, making it possible to get a mortgage with no deposit. Not everyone will qualify, and there are some drawbacks, but let’s take a little deep dive to assess if it could be right for you. In May of 2023, Skipton Building Society became the first bank to offer a 100% mortgage (that means it’s deposit free - the bank is lending you 100% of the money to buy your property) that doesn’t require a guarantor (we’ll go into that later) since 2008. So - how does it work? Would I qualify for the loan? Skipton calls this their “Track Record” mortgage, because it’s based on your rental history. There are some requirements that you have to meet to qualify for the 100% mortgage, for example you have to: Be a first-time buyer Have been renting for at least 12 consecutive months out of the last 18 months, and be able to prove that your rent has been paid on time every month (with proof from bank statements or your letting agent) Be 21 or older Can’t have missed any other payments (even something as small as your Netflix subscription) over the last 12 months Aren’t looking to buy a new-build flat Have experience of paying all household bills (e.g utility bills, council tax etc.) for a minimum of 12 consecutive months, in the last 18 months. What could I borrow? When you’re taking out a regular mortgage (meaning, with a deposit) what you can borrow is calculated by looking at your income, deposit size and regular outgoings. You can use our mortgage calculator to work out roughly what your loan could look like. Though it’s not an exact science, you can usually bet on being able to borrow around 4 - 4.5 times your yearly salary.
Things are a little different with a 100% mortgage from Skipton, where you can usually only borrow what you pay in rent. This is because the lender has evidence that you can afford to pay your rent, and therefore has no belief that you’ll default on a loan of the same size. You would still have to pass Skipton’s own affordability testing to work out if you qualify, and how much exactly you could borrow.
Is a guarantor or deposit-free loan for me?
Martin Lewis cautiously says that he thinks it could be a good option, if you’re carefully advised by experts. One main drawback is that it is a comparatively expensive loan, meaning your interest and repayments would be higher than if you could scrape together even a 5% deposit. Another thing to carefully consider is the very real risk that you could end up in negative equity. Negative equity is where the value of your mortgage is greater than the value of your house. This is bad because a) you're in debt, where your property is worth less than your loan and b) you could struggle to pay off your mortgage if you sell your property, if the loan is greater than the sale value of the house. Why are you more likely to face negative equity with a 100% loan? Because you have less equity in the house. Initially you have 0% equity and your loan-to-value ratio (which works out how much you owe, versus the value of the house) is 100%. If you had a 90% loan, your house would have to depreciate in value by 10% before you entered negative equity. That is a major drawback when considering a 100%, but that’s not to say it shouldn’t be done under careful consideration. A guarantor mortgage is a loan where a close family member (usually a parent or guardian) acts as a guarantor, using their savings or property as security against your mortgage. Lenders would be more likely to lend an unlikely candidate (with a small deposit or irregular income, for example) with a guarantor. A guarantor can even help you to secure a 100% mortgage (as described above), because they act as the safety net, ensuring that payments won’t be missed by using savings or property as collateral. Many argue that previous generations were in a better position to own their own property. This generational disadvantage means that many buyers (particularly first-time buyers) now find themselves in a position where they aren’t able to buy, and need their parents to act as guarantors. Who might it work for? Sure, Brooklyn Beckham knows he could ask his parents to help him get a mortgage, but you could also consider it as an optionion if: You have a low income: most lenders will calculate how much to lend you based on your salary, outgoings and deposit size. If your income is lower than 4 times what you might want to borrow, then a guarantor could increase your borrowing potential You have an irregular income: freelance, self-employed or part-time workers might find that they become more appealing if they have a guarantor. Even if you’ve earned a healthy sum of money this year as a freelance individual, your irregular earnings might be a turn off for lenders, who value regularity and stabilityIs it a good idea?
What about a mortgage with a guarantor?
Who could consider a mortgage with a guarantor?
You have a small deposit, or no deposit: a guarantor could help you if your savings aren’t enough to put down a chunky enough deposit, but you’ll be able to make your monthly repayments. Little or no credit history: not having had a credit card (with a good credit history) means that lenders won’t have evidence to prove your reliability with debt and repayments A bad credit score: if your credit history is poor or patchy, a guarantor could help lenders look more favourably on you So…your vet’s mum’s friend won the lottery and you hit it off at the christmas party. Can they be your guarantor? Um, no. Most lenders require your guarantor to be a close family member – they’ll have different criteria for what constitutes “close family member”, but a parent would be ideal. Your guarantor will need to have: A good credit history: so lenders know they’re creditworthy, and reliable. Savings or a property: your lender may hold some of your guarantor’s savings in a locked account, which they can claim if you default on your loan. Or they will take legal charge of an agreed portion of the guarantor’s property as collateral on your loan. Vitally, your guarantor has to be happy to act as your safety net. They need to fully understand the consequences of acting as your guarantor, and be happy to take a risk on you. Some lenders require that the guarantor receives legal advice before embarking on the journey, in order to ensure that they totally understand the risks involved. This is a sensible thing to do, so that everyone is going into the agreement knowing all the facts. You can compare types of guarantor loans to decide what might work for you and your guarantor – from joint mortgages to property as savings mortgages. Who could act as your guarantor?
Round ups
Rising interest rates and the closing of the Help to Buy scheme after 10 years has meant buyers (particularly first-time buyers) have felt a bit stuck. But don’t despair, there are a handful of other options available if your borrowing potential is limited. From a guarantor mortgage, to a Lifetime ISA, it’s worth exploring your options to see what could work for you.
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