Personal FinanceProperty

New Scheme For First Time Buyers

Young couple moving into new home

The government have just unveiled their latest help-to-buy scheme, available specifically for first time buyers looking to step onto the property ladder for the first time. It is now open to applicants – so let’s take a look at who it can help and how to make it work for you.

Known as the help-to-buy equity loan scheme, it can only be used to buy property that meets the following criteria:

  • It must be a new build
  • It must be worth no more than £600,000 in London, or 1.5x the average first-time property price in any other region.

Those who are eligible can use the scheme to borrow up to 20% of the property’s value – or 40% in London. The new restrictions on price mean that first-time buyers will be given different price caps depending on where they’re looking to buy. The maximum price in the north-east would currently be set at just over £180,000, for instance, while those in the east midlands could spend £260,000.

Property prices vary substantially from region to region, so those looking to take advantage of the scheme are likely to find that the homes available to them are similar despite the difference in price.

construction site of new townhouses

One stand-out feature of the scheme is the fact that those applying only need to raise a 5% deposit. While 5% deposits for first-time buyers used to be standard, the current mortgage market has seen them scrapped by most lenders. For those who are unable to raise a more substantial 10 or even 15% deposit, this could offer a lifeline. There will also be a reservation fee of £500 needed to secure a loan.

In return, eligible applicants don’t have to pay any interest for five years. The loan can be repaid at any time while the buyer is paying their mortgage. If the property is sold or the mortgage repaid, then the loan also needs to be settled.

After the five-year period has passed, you’ll need to pay 1.75% interest on the loan. There’s also a £1 monthly maintenance fee. This keeps the loan relatively cheap at first, however the interest rate will rise every year. If you don’t repay the loan relatively quickly, you may find that the costs start to rise quite significantly. Ideally, you should enter into this type of agreement with a plan for how you’re going to repay the loan (and how quickly).

As this is an equity loan, the amount that you owe will rise when your property value increases. Or, if your property value falls, the amount that you owe will also decrease.

As with any financial decision, this isn’t something to be entered into lightly. For those with their heart set on home ownership it could be a very helpful option, and definitely one worth exploring. However it’s not without its costs. It’s important to ensure that you fully understand how an equity loan works, how it differs from a normal loan, and what the long-term costs will be before you make your application. For this, we would recommend seeking independent advice.

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