Planning To Buy: Overview and Options

1

Overview

Part 1 of Beagle Street’s Home Buyers’ Guide is all about planning to buy. This is split into two pages:

2017: The Options

This outlines all the finance options available to first time buyers, with particular reference to changes in government policy for 2017, including:

  • Government-assisted buying Schemes:
    • Help to Buy
    • Right to Buy
    • Shared Ownership
    • Starter Homes
  • Government-assisted saving Schemes:
    • Help to Buy ISA
    • Lifetime ISA
  • Non-Government-Assisted Options
  • What 2016’s Autumn Statement means for the first time buyer
  • Loan-to-value – what is it, and why is it important?

Knowing the Costs

This gives an overview of all the costs outside of the all-important deposit, including:

  • Stamp duty
  • Solicitor’s fees
  • Valuation & surveys

Goal

By the end of Part 1, you’ll be fully clued up on:

  • How much money you need to buy a house and all associated costs
  • Ways of building up a deposit
  • All the government-assisted options available to you
Beagle talking to Street

Introduction

Despite many predictions of a post-Brexit slump in the property market, UK house prices are on the rise and there’s no indication in recent statistics that this could tail off any time soon. With the average property price in September 2016 at £217,888 [1], finding the required deposit – which isn’t fixed, but is often 10% or more [2] – may seem to be an ever-more unrealistic dream for many first-time buyers.

But what seems unrealistic needn’t be so.

Despite government announcements to change their Help to Buy policy for 2017, there are still a number of schemes (some brand new, others in place since 2013) available to help first time buyers get themselves on the ladder. The problem is that, with all the changes, understanding what’s in and what’s out could present a bit of a headache.

Which is why we’ve summarised all the options below. And we’ll start with the much talked about Help to Buy scheme:

Government-Assisted Buying Schemes

1.Help to Buy

First of all, you may have read about the government ending Help to Buy on 31st December, 2016. Yet this is only partly true. When it first came out, Help to Buy was actually split into two formats: the ‘equity loan’ and the ‘mortgage guarantee’. Only the second of these (mortgage guarantee) has been axed completely.

Meanwhile, the equity loan option is still available in England, Scotland and Wales, with a separate version also available to Londoners. As such, Help to Buy is still a realistic option for thousands of potential home owners. Here’s how it works:

Equity loan

Under this option, you need to find a 5% deposit yourself and the Government should offer an interest-free loan of between 15% and 40% (depending on where you live in the UK). The remaining percentage not covered by either the deposit or interest-free loan is paid for with a mortgage. After 5 years, you must either pay back the loan as a lump sum or start paying interest. The interest is 1.75% [3] of the amount of your original loan, which increases annually along with the RPI (Retail Price Index).

The Equity Loan option is only available with new-build homes up to a maximum value. This is broken down as follows across the UK:

  1. England
    • Maximum property price: £600,000
    • Based on a 5% deposit, the government should lend: 20%
  2. London (Greater & Central London)
    • Maximum property price: £600,000
    • Based on a 5% deposit, the government should lend: 40%
  3. Northern Ireland
    • Scheme unavailable
  4. Scotland
    • The maximum property price changes depending on the date you buy. The sooner you buy, the higher the value of property you could purchase:
      1. Complete on or before 31/03/17: £230,000
      2. Complete on or before 31/03/18: £200,000
        Complete on or before 31/03/19: £175,000
    • Based on a 5% deposit, the government should lend: 15%
  1. Wales
    • Maximum property price: £300,000
    • Based on a 5% deposit, the government should lend: 20%

Mortgage guarantee

This is the option that was discontinued on 31st December, 2016. However, we’ve added an explanation below for clarification and to help differentiate between this and the ‘equity loan’ option:

With the mortgage guarantee, the buyer was still required to find a 5% deposit but, instead of offering a 20% loan, the Government provided a guarantee to the lender of up to 15% of the property price. Because the Government acted as a guarantor, it was easier to get a mortgage of up to 95% on either a new or old property.

With Help to Buy:

  • The value of property you could buy is restricted depending on where you live.
  • The property must be a new build.
  • You won’t be able to buy a property in conjunction with another scheme such as Shared Ownership.
  • You won’t be able to rent out your home after purchase.

2.Right to Buy

This gives council tenants, and tenants of some housing associations, the right to buy their home at a discount. To qualify, you need to have rented your home for at least 3 (consecutive) years.

How much discount could you get if you qualify? Well, the maximum is £77,900 across England, except in London boroughs where it’s £103,900 [4]. These figures typically change every year in line with the Consumer Prices Index (CPI), but they are frozen for 2016/2017. The actual discount you’ll get depends on 3 factors;

  • How long you’ve been a tenant
  • Whether you’re buying a flat or house
  • The value of the property

There are several regional variations of this scheme. It was scrapped in Scotland in August 2016, and the Welsh assembly has announced plans to follow suit. The scheme is available in Northern Ireland although the rules are different.

3.Shared Ownership

If you might struggle to buy a home outright, perhaps because of the cost, or because you aren’t able to find a mortgage for the amount you wish to borrow, shared ownership could be an option. Essentially, this is a cross between buying and renting.

Shared ownership enables you to purchase a share of a home (between 25% and 75%), and pay rent on the part you don’t own. After buying your initial share, you then have the option to purchase more of the property as and when you could afford it.

To be eligible for the shared ownership scheme in England, you must [5]:

  • Be a first-time buyer, or someone who can’t afford to purchase outright
  • Have a combined household income of less than £80,000 (£90,0000 in London)

As with Help to Buy and Right to Buy, the Shared Ownership scheme does vary from country to country. Learn more about how the scheme works in your region with the following links.

4.Starter Homes

Finally, you may have heard MPs and local governments pledging to build new ‘starter homes’. This isn’t a scheme like those mentioned above where government assists with the mortgage or buying of a property. Instead it’s about making homes available at a discount. So you could combine a starter home with a Government-assisted buying scheme.

Under this proposal, 200,000 new homes are built, then sold at a (minimum) discount of 20% of the market price. These houses are primarily built on ‘brownfield sites’ – land previously used for industrial purposes or some commercial uses. This allows the builders to avoid timely and expensive planning costs.

The key facts about this scheme are;

  • You must be 40 or under to qualify.
  • You must be a first time buyer.
  • The maximum property price is £250,000 (£450,000 in London).
  • Property purchased under this scheme cannot be resold at their market value, or let, for five years after purchase.

There is a useful guide found on the Which? website to the Starter Home Scheme.

Cute Beagle dog

Government-Assisted Saving Schemes

Of course, another option for first-time buyers is to find the appropriate deposit for a property and secure a mortgage without assistance from the various schemes above. If you could do this, you may find it preferable as you’ll only owe money to a single institution (the mortgage lender) at often better rates. It also means you wouldn’t have to cope with additional outgoings, such as rent in the example of Shared Ownership. Two ISAs have recently been introduced by the Government to help you buy your first home. These are:

Help to Buy ISA

This could be a useful way of reducing the amount of mortgage you need (and therefore the repayments you have to make) to buy your house. For every £200 you add to this ISA, the Government should contribute 25% (£50), up to a maximum of £3,000 (on £12,000 contributed by you). This bonus is tax-free.

There has been some confusion over the Help to Buy ISA. Until recently, it was thought that the Government bonus could be put toward your initial deposit (paid at exchange of contracts). However, this is not the case – the bonus is paid to your mortgage provider only when you complete.

So, while the Help to Buy ISA may be a useful way of reducing your overall mortgage, you still have to find the initial deposit. The Help to Buy ISA is available until November 2019 [6].

Other facts worth knowing about the Help to Buy ISA are:

  • You could deposit a lump sum of up to £1,200.
  • The maximum monthly instalment is £200.
  • You’ll only start earning a bonus when the sum reaches £1,600.
  • You could make one application per person – therefore, a couple looking to buy could set up two separate ISAs to be used for one home.
  • The maximum property price for which this ISA could be used is currently £250,000 (£450,000 in London).
  • You can’t pay into a regular ISA at the same time.

Example: you deposit £1,200 pounds in month 1, and £200 a month in months 2 and 3. Your total is now £1,600, so you qualify for a bonus of £400. This means that your mortgage could immediately be reduced by £2,000 upon completion of your purchase. 

Check your eligibility for the ISA on the Help To Buy website.

There are a number of banks and building societies offering the Help to Buy ISA, and you’ll be able to compare them on most major price comparison sites. You’ll find more information and advice at the Money Saving Expert website.

Lifetime ISA

This ISA should be available from April 2017 and offers you a tax-free bonus of up to £1,000 a year. You could use this sum either for helping to buy your first home (unlike the Help to Buy ISA, you could use this one for a deposit! [7]), or as savings for your retirement. The key facts are:

  • You must be aged 40 or below when you open the account.
  • You could save a maximum £4,000 per year.
  • The Government should add 25p for every £1 saved (paid into the account at the end of each tax year).
  • The money could be put towards a deposit on a property worth up to £450,000 anywhere in the UK – but you must be a first-time buyer.

Which ISA is best?

If you’re wondering which is best, the Lifetime ISA or the Help to Buy ISA, you’ll find a useful comparison on This Is Money. However, you may be interested to know that you could hold a Lifetime ISA and a Help to Buy ISA at the same time.

Top ISA Tip

If you’re saving to buy with a partner, you could each set up a Help To Buy ISA, doubling your mortgage reduction.

Street talking to Beagle

Non-Government-Assisted Options

While the schemes described above may be helpful for many, it’s still possible to buy your first home with only a small deposit and without government assistance. Although, since the credit crunch in 2008, the options for 100% mortgages have become limited, there’s still an increasing number of lenders offering competitive mortgage products with only a 5% deposit that aren’t part of the Help to Buy scheme.

You could compare some of the mortgages available based on a 95% loan-to-value rate at the Know Your Money website, as well as other comparison sites.

In 2007, you had a choice of 238 100% mortgages.
In 2016, there were just 8 to choose from.

Source: The Guardian

What 2016’s Autumn Statement Means for the First Time Buyer

On 23 November 2016 the Chancellor, Philip Hammond, delivered his first (and last – he’s abolished it from now on) Autumn Statement. This has implications for everyone, including first time home buyers.

Everything listed so far in this section has been written after this announcement, showing there are clear government-assisted options to help you towards your first property.

However, depending on your personal circumstances, you may be affected in ways not outlined in our Home Buyers’ Guide. For more information, there are many helpful articles online, including this useful summary from Zoopla. If you’re in any doubt, an expert should be able to advise you.

Aside from what has already been mentioned in this section, here is a summary of key housing announcements from the Autumn Statement:

Affordable homes

  • An extra £1.4bn should be made available to local councils, to go towards affordable rent schemes, shared ownership and ‘rent to buy‘ schemes. The Government estimates that this should result in 40,000 more affordable homes being built [8].
  • 90,000 affordable properties should be built in London by 2021.
  • Restrictions that discourage developers from building low-cost homes should be relaxed.

Help to Buy

There should be continued support for the equity loan element of this and the Help to Buy ISA. However, the mortgage guarantee scheme should be discontinued from the end of 2016).

Deposit savers

Interest rates are currently low, which is good news if you have a mortgage, but not so good if you’re trying to save a deposit. Some changes that might help include:

  • A new NS&I savings bond. This could offer a return of 2.2% over a (fixed) three-year term, with a maximum £3,000 contribution. Full details are not yet known.
  • The Help to Buy ISA and the Lifetime ISA, which we covered earlier.
  • The Personal Savings Allowance should allow basic rate taxpayers to earn £1,000 in savings interest, tax-free.
  • The annual tax-free ISA allowance (currently £15,240) should rise to £20,000 from April 2017.

Right to Buy

The Chancellor also confirmed that a large-scale regional extension of the Right to Buy scheme, should go ahead [9]. This is expected to allow some 3000 housing association tenants to buy their home.

Stamp Duty

This wasn’t mentioned in the Autumn Statement, despite many calls to reform it.

Loan-to-value – what is it, and why is it important?

Loan-to-value (LTV) is a term you’ve probably heard before. And it means pretty much what it says – it’s the percentage of your house’s value that’s accounted for by your mortgage.

So, for example, if you have a mortgage of £180,000 on a house worth £200,000, you have a LTV of 90% (180,000 is 90% of 200,000) and you have 10% ‘equity’.

For instance, if the value of your house were to go up from £200,000 to £220,000, the mortgage amount you owed might not change. I.e. you’d still owe £180,000 even though the cost of the property had risen. In simple terms, your mortgage could now represent a smaller proportion of your property’s overall value, so the LTV could go down and you’d have more equity (great!).

On the other hand, if the value of your house were to fall, the LTV could increase (not so great…) In fact, it’s not uncommon for people to have a LTV of 100% (no equity). In some circumstances (during the credit crunch, for example), many people found they had ‘negative equity’. In other words, they owed more than their house was worth.

LTV plays a key part in a lender’s decision whether or not to offer a mortgage. Keeping it as low as possible might not only help you get a mortgage in the first place, but could be very important if you want to re-mortgage in order to get a better rate. You could take steps to improve your LTV by (a) paying off your mortgage capital, or (b) making improvements to your house to improve its value.

Or – even better – both!

Next Steps

Once you’ve read through all the options above, you’ll have an idea what method of getting on the housing ladder is more suitable for you.

Sourcing the deposit should be your first aim but there are other costs around buying, including stamp duty and solicitor fees. Find out all about these in the next part of our Planning to Buy section: ‘Knowing the Costs’.

Previous page

Home Buyers Guide Introduction

Next page

Planning To Buy – Knowing The Costs

Appendix

  1. GOV.UK – UK House Price Index summary: September 2016 – 15th November 2016
  2. Which? – How much deposit do you need for a mortgage? – September 2016
  3. Mortgage Advice Bureau – Help to Buy: Equity Loan
  4. GOV.UK – Right to Buy: buying your council home – 4th January 2017
  5. Help To Buy – Shared Ownership
  6. Help To Buy – Help to Buy: ISA: FAQ
  7. This is Money – Treasury reveals details of the Lifetime Isa – and holders WILL be able to use their bonus towards a house deposit – 16th September 2016
  8. GOV.UK – Autumn Statement 2016: some of the things we’ve announced – 23rd November 2016
  9. Which? – Right to Buy – November 2016

Additional sources

  1. Money Advice Service – Help to Buy scheme: everything you need to know
  2. GOV.UK PDF – Lifetime ISA Explained