If you are thinking of getting on the property ladder and taking out a mortgage for the first time, the whole process can seem very daunting. Although there are some major obstacles that first time buyers have to overcome, the good news is that there is plenty of good advice and support available designed to help people buy their first home.
The importance of having a deposit
One of the major obstacles that first time buyers face when trying to get a mortgage is the deposit. In the current climate, 100% mortgages, where you can borrow the total cost of a property, are almost unheard of. This means that any first time buyer will need to have a deposit, and the larger the deposit, the better the deal the lenders will be able to offer.
The bad news for borrowers at the moment is that a high loan to value (LTV) rate, i.e. anything over 75% where the deposit is less than 25%, will not be enough to qualify for a good deal on a mortgage. Having a 10% or even 20% deposit (90% 0r 80% LTV) will mean that you have to pay back the mortgage at high rates of interest. But saving enough money to come up with over 25% of the value of a house is a serious challenge for most people, and so to help first time buyers get on the property ladder, the government has created the Help to Buy scheme.
The Help to Buy scheme
The government wants to encourage people to enter the property market and in turn boost the building industry, seeing the health of both as integral to a growing economy. In recognition of the fact that few people are in a position to save the tens of thousands of pounds needed to make up a 25%-plus deposit on a house, it has created the Help to Buy scheme. There are two parts to the scheme, equity loans and mortgage guarantees. The equity loans scheme began in April 2013, and the mortgages guarantee is due to begin in 2014.
Help to Buy – Equity loans: These are loans for people who want to buy a new build property only. To qualify for the scheme you will need to have a deposit of at least 5%, and the property you want to buy should not be worth more than £600,000. Also, the scheme is only available for people who are buying a property that they themselves will be living in most of the time; it cannot be let or used as a second home. The government will lend you up to 20% of the property’s value as an equity loan, providing you have a deposit of at least 5% and can get a mortgage for 75%. The equity loan is interest free for the first five years, after which time there will be an admin fee that starts at 1.75%.
The loan will have to be paid back in full within 25 years, or when the mortgage term finishes or you sell the property, whichever comes first. The great thing about the Help to Buy equity loan is that it can really help people who don’t have access to a large deposit to get on the property ladder. The drawback is that is another loan that will have to repaid, along with the mortgage, and the admin fee on top of the interest rate can really add up over time. Also, don’t forget that this loan is only available to people who want to buy a new build property.
Help to Buy – Mortgage guarantees: Due to be launched in January 2014, this scheme will provide people who only have a small deposit (at least 5%) with a guarantee on any mortgage over 80% of the property’s value. This means that lenders will be more willing to give a mortgage to those with small deposits.
Things to remember
If you are buying a property for the first time there are additional costs that you will need to factor into your budget. There are a lot of administration fees associated with getting a new mortgage, as well as conveyancing and property surveys. Also, don’t forget stamp duty, which is currently set at 1% of the value of all properties that are priced above £125,000.