In a move that will be “the biggest expansion of home ownership since the 1980s”, Mr Johnson said that two million more people will be able to buy their homes and people will be given “the chance to take out a long-term, fixed-rate mortgage of up to 95% of the value of the home, vastly reducing the size of the deposit”.
Low deposit mortgages have virtually disappeared from the market since the start of the coronavirus pandemic earlier in the year with many lenders withdrawing 90% and 95% loans and asking for deposits of at least 15% from those looking to buy their own homes. This makes it very difficult for first-time buyers to get a foot on the property ladder.
It is not exactly certain how the government will fund its new promise. Partner and head of Graysons’ property department, Caroline Murray, says:
“The housing market remains buoyant at the moment, nor surprisingly bolstered by the stamp duty holiday. But first-time buyers are still finding it difficult to find the deposit they need – unless they are able to use the existing or new Help to Buy Equity Loan schemes. We are not yet sure how the new 5% deposit scheme will be implemented. It could be by extending the Help to Buy schemes or the reintroduction of mortgage guarantees, but whatever action the government takes, it will be good news for first-time buyers and for the housing market in general”.
New Help to Buy Equity Loan scheme 2021 – 2023
The government has introduced a new Help to Buy equity loan scheme (2021 -2023) which will be available for first-time buyers only for the purchase of a new build home. Like the existing Help to Buy scheme, it will provide loans of up to 20% (40% in London) where a new home is being bought. The buyer will need a minimum 5% deposit and will have to fund the rest with a mortgage. With this new scheme, the amount you can spend on the new build home will depend on where you live. In the Yorkshire and Humber region, this will be £228,100 and in the East Midlands, it will be £261,900. Like the existing Help to Buy scheme, there will be a £1 monthly management fee for the life of the loan. There are three circumstances in which you will need to pay off the equity loan in full. This is when you:
- pay off your mortgage
- sell your home
- come to the end of your equity loan term
But remember that if your home has increased in value, you will need to pay back the same percentage of the cost of your home that you borrowed. So, if your home cost £200,000 and you borrowed 20% (£40,000) and you sell it for £250,000, you will need to pay back £50,000. The same applies if your home falls in value, so you will pay 20% of the new lower value of the home, not of the amount you borrowed. You can pay off the equity loan either in full or in 10% chunks whenever you like before the loan period comes to an end.
The government has promised a review of the scheme when it comes to an end in 2023
Can I still use the existing Help to Buy Equity Loan scheme?
The existing scheme is available to first-time buyers and existing home owners. Again it is for the purchase of a new build home but the value can be up to £600,000. The scheme comes to an end on 31 March 2021, so if you want to use this scheme the builders must have completed the build and it must be ready for you to move in by 28 February 2021. You must have completed the purchase by 31 March 2021. However, there has been some extension to this due to the coronavirus pandemic. If you reserved your new home before 30 June 2020 and completion has been severely delayed as a result of COVID 19, you may be able to complete your purchase by 31 May 2021 and your builder may have until 30 April to have the house built and ready for you to move in. Find out more on the government website.
Can I still use my Help to Buy ISA?
Yes, although these have not been available to new savers since November 2019, if you are an existing saver and a first-time buyer, you can still claim your 25% bonus on the purchase of your first home as long as it is by 1 December 2030. If you have a Lifetime ISA (LISA), which attracts a 25% bonus each year on savings in that year of up to £4,000, you can use it, along with your partner’s LISA (they will need to be a first-time buyer too or will have to pay a 20% withdrawal charge) to buy your first home up to the value of £450,000. You will need to use a conveyancer or a solicitor when using a LISA to buy your home.
It is possible that the government will achieve its goal by introducing a system similar to its Help to Buy Mortgage Guarantee scheme, whereby lenders were able to offer mortgages with a 5% deposit on properties up to the value of £600,000 (£300,000 in Wales) and the government offered a guarantee on a further 15% so the lender was only taking a risk on 80% of the value of the property.
For further advice on buying your first home, have a look at the information on our webpages, or contact one of our property experts now. You can also get a competitive quote by using our conveyancing calculator.
Author: Caroline Murray, partner and head of Graysons’ property team.