House prices have been rising rapidly over the past year or so, going up by 10% in 2021, according to the Office for National Statistics. This took the average house price in the UK to £275,000 in December 2021, which is £27,000 higher than 12 months previously.
For many people, especially first-time buyers, this is just unaffordable. As well as high prices, another major stumbling block to buying a home and getting a mortgage is the deposit.
Typically, mortgage lenders require a deposit of 10% although there are lenders who will allow 5%. But the lower the deposit, the higher the mortgage interest rate as lenders view small deposits as more risky for getting their money back.
So what options do first-time buyers have to get a foot onto the housing ladder?
Help to Buy is still an option but this government-backed scheme ends in less than a year on 31 March 2023 and there are now regional caps on the maximum price of a home.
However, there is a new government scheme being introduced called First Homes, which offers at least a 30% discount off the market value of the property. Plus, there is the growing popularity of shared ownership and a 5% deposit scheme called Deposit Unlock.
Just Mortgages recently held a New Build and Affordable Housing Event where these housing options were discussed and it was evident that there is not enough consumer awareness and understanding of affordable options.
What is shared ownership?
Let’s start with shared ownership, which is part mortgage, part rent. This is where you buy a share of the property using a mortgage and the rest is owned by a landlord, usually a housing association, and rent it paid.
The minimum share you can usually buy is 25% and after that you have options to purchase more of the property – this is known as staircasing. So one day you could own all of your home.
For the mortgage you only need a deposit of 5% to 10% of the share of the property you are buying – not the full purchase price. Although there are a few lenders who require no deposit for shared ownership – this is known as a 100% loan-to-value (LTV) mortgage.
A shared ownership example
You are buying a 25% share of a house valued at £200,000 so you need a mortgage for £50,000. The lender requires a 10% deposit equating to £5,000.
If you were to buy the £200,000 house outright with a 10% deposit, you would need to find £20,000 as a down payment.
In this case, 25% of the cost of the house is paid back via a mortgage and the other 75% is paid in rent. So your rental payments will be higher that your mortgage payments.
Shared ownership currently accounts for only around 2% of housing stock but housing associations are building more of these homes. The government has pledged funding for up to 90,000 new shared ownership properties in the next five years.
It should also be noted that shared ownership is not just restricted to first-time buyers and is also open to those who have already owned a home.
What is First Homes?
First Homes is a government scheme aimed at first-time buyers who, if eligible, can get a minimum discount of 30% off the market value of a new build property in perpetuity. This means that the same discount is passed onto future purchasers when the property is sold.
The scheme is open to first-time buyers with a household income of £80,000 nationwide or £90,000 in London – this is the same as shared ownership eligibility.
There are price caps for property value set at £250,000 nationwide or £420,000 for London, which corresponds with caps for Lifetime ISAs and Help to Buy ISAs.
Criteria is dependent on the local authority but includes living or working in the area or family connections to the borough. Local authorities can also increase the discount up to 50% and lower the household income and price caps if that work better for their region.
Mortgage must be for at least 50% of the purchase value of the property and should be your main or sole residence and there are restrictions on letting.
Buyers apply to the property developer who then sends the application to the local authority for approval.
The government’s Department for Levelling Up, Housing and Communities has confirmed 1,500 homes will be built over 100 locations in England by March 2023.
What is Deposit Unlock?
There is also a scheme called Deposit Unlock, whereby you only need a 5% deposit for a new build property. This is unusual for new builds which generally require a deposit of at least 15% to 20%. The mortgage rate is better than standard 95% loan to value (LTV) mortgages because the house builder pays to insure the mortgage.
There are at least 17 house builders taking part in the scheme, which was set up by the Home Builders Federation, Homes for Scotland and reinsurance company Gallagher Re.
At the moment only Nationwide and Newcastle Building Societies offer Deposit Unlock mortgages but we expect more to join in.
So there are options for affordable housing and a mortgage broker will be able to advise you on what is available for your circumstances.
John Doughty is financial services director at Just Mortgages New Build Division, a nationwide mortgage broker firm
