What are Help to Buy and Shared Ownership and are there other government schemes to help you buy your first home?

FIRST-time buyers struggling to get on the property ladder can take advantage of one of the government schemes aimed at home ownership.

It’s no surprise that it feels out of reach – think tank The Resolution Foundation said in its latest Housing Outlook report that owning your own home is likely to get even harder for young people in light of the coronavirus pandemic.

This is mainly down to incomes taking a hit and lenders tightening mortgage criteria as a result of the economic impact of lockdown.

Even the possibility of falling house prices, which could happen as a result of the recession, “won’t make things any easier” for those who don’t have a large deposit or aren’t able to borrow from family, the report continued.

It all feels a bit glum right now but it is possible – every week we speak to first-time buyers for our My First Home series who’ve managed it, including some who’ve achieved buying a home since lockdown.

The government has announced a £12billion programme that will see around half of new homes built between 2021 and 2026 made “affordable”.

This means they’re eligible for one of the government incentives. Here we take you through what help is available to you and where to look for it.

What is a Help to Buy equity loan?

Under the Help to Buy equity loan scheme, home buyers can take out a loan worth up to 20% – or 40% in London – of the value of the property to lower the mortgage.

It’s designed to help those who are locked out of the property market due to lower-incomes, even though they have enough cash for a deposit.

What type of mortgage suits you?

THERE are tonnes of different mortgages rates out there but you need to make sure that it's the best one for you. Here are some of the ones available:

Fixed rate – The interest you pay is locked for two, three, five or 10 years. It's good if you sign up when the interest rates are low, but if interest rates drop, you're stuck paying the higher rate.

Variable rate – Standard Variable Rate (SVR) means that your rates will go up and down with the market trends.

Tracker mortgage – The rates change in line with the Bank of England's base rate. So if it goes up, so does your mortgage rate.

95 per cent – This is the rate for people who can only afford to put down a five per cent. But with such a small deposit you're at risk of falling into negative equity if house prices drop. If they drop six per cent then your house is worth less than your mortgage.

Flexible – You can choose to pay more than your regular payment if you can afford it. Then if you've overpaid, you can take a payment holiday if you find yourself in difficult circumstances. But in return for the flexibility you'll be hit with higher rates.

Cashback – These marketing ploys aren't always as good as they're cracked up to be. The idea is that the lender gives you money back when you take out a mortgage with them. But take a closer look at the interest rates and any additional fees as you're likley to find better rates elsewhere.

The loan is provided on top of a normal mortgage. You then take out a mortgage to cover the rest of the property's value.
You’ll need to stump up a deposit worth 5% of the total value of the house to benefit, even if you need less to be approved for a mortgage.

The loan is interest free for five years and from the sixth year, borrowers are charged 1.75% on the outstanding balance.

This then increases every year inline with the RPI measure of inflation plus 1%.

You can pay it off by either adding the loan to your mortgage when you come to remortgage, when you sell it (providing house prices have gone up) or paying it off in cash instalments worth at least 10% of the property value.

The amount you owe is based on the property’s current value, which could see you repaying more than you borrowed if house prices go up.

For example, say you borrowed £40,000 (20%) from the government to buy a £200,000 property.

Ten years later, you want to pay back the loan but your home is now worth £250,000.

You owe the government 20% of £250,000, which works out at £10,000 more than you initially borrowed.

If house prices depreciate, you still owe the amount that you borrowed even if you've fallen into negative equity.

The loan can only be used to buy new build property that has been allocated by the developers to be eligible for the scheme.

Since it launched in 2013, 272,852 properties have been bought using the initiative, according to government figures, 82% of which were first-time buyers.

But critics say the scheme has pushed up house prices and as a result, only helped those who could already afford to buy property.

In 2019, research by the National Audit Office (NAO) found that shockingly, around one in 25 home buyers using the scheme had household incomes of over £100,000.

The government is launching a reformed Help to Buy Equity Loan scheme on April 1, 2021 which will run until March 2023.
The new scheme will be limited only to first-time buyers and there will be regional price caps.
The current format was due to end in December 2020 but has been extended by two months because of building delays caused by the pandemic lockdown.

What is Shared Ownership and how does it work?

Shared ownership lets buyers purchase a portion of the equity if they can't afford to take out a mortgage for the total value of the property.

You’ll co-own your home with a housing association, which will charge you rent on its portion of the property.

The scheme is open to anyone looking for their next home, not just first-time buyers, but they are reserved for specific properties.

They will still need to put down a deposit and can take out a mortgage for the part that they own.

The monthly mortgage repayments will be on top of the rent you pay to the housing association.

How much does it cost to staircase on your shared ownership property?

STAIRCASING is a legal process so you’ll have to fork out for more than just the value of the share you’re buying.

You’ll need to pay for a surveyor to give an up to date valuation of the property, as well as any solicitor fees.

You may have to think about stamp duty if you buy more than 80 per cent of the property. The amount depends on the value of the property.

The Chancellor recently announced a stamp duty holiday for properties worth up to £500,000 until March 2021. This means that as long as the share value you purchase is less than the cap, you won't have to pay the tax.

You may, however, have to pay fees on a new mortgage.

These can cost up to £999 depending on the deal and your circumstances.

But unlike private renting, you won’t have a landlord who can ask you to move out at any time, and your rent rate is likely to be less than market value.

Homeowners must purchase between 25% and 75% of the property to use the initiative, and they can then “staircase” – buy more shares in instalments – until they own 100% of it.

The minimum amount you can staircase varies depending on what is outlined in the lease but is typically between 5% and 10%.

It's worth bearing in mind though that the portion you buy is worth a percentage of the current property value, so you'll pay more if house prices go up.

But it also means you’ll pay less if house prices fall.

You will have to pay legal fees and stamp duty tax – if applicable – every time you staircase, which could end up costing you more in the long run.

We previously spoke to a first-time buyer who ended up paying the tax three times after purchasing her shared ownership flat.

The scheme is being revamped from the start of next year, and will see the minimum amount of shares home buyers must purchase reduced to 10% and staircasing intervals reduced to 1%.

One of the issues with shared ownership is that you don’t have as much freedom when it comes to selling your home compared to if you hadn’t used the scheme.

If you own less than 100%, your housing association will get a set period of time to find a buyer, meaning you won’t be able to accept a higher offer from someone else.

Many shared ownership leases contain a clause that gives the housing association dibs on buying it back before offering it on the market.

If they don’t want it, you can sell it to whomever you want to.

What about a Lifetime Isa?

The Lifetime Isa replaces the Help to Buy Isa which closed to new applicants at the end of last year.

It will give anyone aged between 18 and 39 the chance to save tax-free and get a free government bonus of up to £32,000 to use towards their first home, or retirement.

You can save up to £4,000 a year into the Lifetime ISA (LISA), either as a lump sum or by putting in cash when you can.

The government will then add a 25% bonus on top, effectively giving you free money.

It means that if you save £1,000 a year, you'll have £1,250 after 12 months, and if you save the full £4,000 a year you'll have £5,000.

Lifetime ISA catches

THESE are the things you should be aware of before opening a LISA account:

• If you want to buy a home worth more than £450,000 with your LISA, 20 per cent of what you withdraw is taken off
• You can only use a LISA for a property if you have NEVER owned a property before (including a share of a property that was inherited, or a home overseas)
• If you're a first-time buyer purchasing with someone else (a partner or friend, for example), they cannot have owned a property before
• If you're using the money for a new home it is paid directly to a solicitor, not to you
• If you reach the age of 40 on or before 6 April 2018 you won't be eligible for a LISA
• If you're using the money for retirement you can only access it on your 60th birthday. By contrast, you can access money in a private pension from the age of 55.

Savers can continue to put money into the account until they're 50, so you can benefit from the government bonus for up to 32 years if you open the account when you're 18.

Putting aside the maximum amount in a Lisa for the full term would net you £32,000 of free government cash in total.

But there are a few catches. You can only use a LISA for a property if you have NEVER owned a property before.

That means if you're a first-time buyer purchasing with someone else (a partner or friend, for example), they cannot have owned a property before.

The money never comes to you, but will be paid directly to a solicitor.

There's a penalty fee if you want to withdraw the cash before you're 60 or not to buy your first home.

It will cost you 20% of the amount you are withdrawing, which is equal to the bonus you would have earned on it.

You can only use the cash to buy property worth £450,000. If you want to use the money to purchase a home worth more than this then you'll be forced to pay the withdrawal fees.

Can I still get a Help to Buy Isa?

Help to Buy Isa's closed to new applicants in November 2019 but you can still use it to put towards buying a house if you've already got one.

The bank accounts are backed by the government, which will top up your savings by 25%, up to £3,000, to help you on the property ladder.

So for example, for every £200 you save the government will top it up by £50.

To claim the maximum government bonus, you'll need to have saved £12,000 in the account, which will be topped up to £15,000 in total.

You can also earn interest on top of whatever you save.

The rates are set by the bank who you've taken an account with and vary depending on the lender.

Remember though, you won't ever receive the bonus as a lump sum of cash – it will be handed straight to the solicitors to be tied up in the other costs.

It means you won't be able to use it towards the deposit for your home.

We spoke to a young couple from Leicestershire who were left with over £5,000 worth of debts after falling foul of the loophole.

You'll need to claim your bonus by December 2030 if you want to use the money to buy your first home.

You can only claim the government top up on either the Help To Buy Isa or the LISA, not both.

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