New build mortgages guide for first time buyers
Some background on new builds and first time buyer mortgages
The availability of these new builds is improving. Property shortages across the country, especially for first time buyers, have been well covered in the media in recent times; as a result, government initiatives are ensuring that 300,000 new homes a year are being built over the next 5-6 years. As an additional incentive, the Government is offering a number of new build mortgage schemes to encourage interest from purchasers, including several specifically for first time buyers to help them onto the property ladder. Government guarantees encourage mortgage lenders to offer a wider range of products to buyers with low deposits; our mortgage advisers can offer expert advice on these products and how they best fit your situation.
What’s more, some developers offer further incentives to first time buyers, including contributions towards your deposit and paying some or all of your Stamp Duty. It’s always worth checking with the developer to see what they can offer in conjunction with government or mortgage lender options.
What are the schemes available?
Help to Buy: Shared OwnershipThis government scheme is mostly aimed at first time buyers, although lower income households are also eligible. You can apply if your total household income is £80,000 a year or less, or £90,000 a year or less if you’re in the London area.
The scheme provides financial assistance by enabling you to buy a share of a new build home, usually somewhere between 25% and 75%, and then paying a heavily subsidised rent on the rest. You’ll need to take out a suitable mortgage to cover your share of the home’s purchase price, and pay this off in conjunction with the monthly rent. Our advisers can help you with mortgage options for this scheme. Alternatively, you can partially or completely fund your share through your own savings, such as a Help to Buy ISA.
Once you have moved in to your property, you can then purchase a further share or shares at a later date if you want to, giving you the option to eventually own your home as your finances allow.
Help to Buy: Equity LoanWith this Help to Buy option, you can purchase a new build home (under £600,000) with only a 5% deposit. The government then gives you a further sum up to a maximum of 20% of the property value, therefore providing you with a larger deposit, better loan-to-value rate, and a wider choice of mortgage options. And you won't be charged any interest fees on the government loan for the first five years.
If you're looking to buy in London, the additional sum goes up to 40% of the property value, reflecting higher house prices in the Capital.
You can pay back part or all of your equity loan at any time. However, in a similar way to a standard mortgage, you must repay the equity loan after 25 years, or earlier if you sell your home. If you sell, you must repay a percentage of the proceeds of the sale that matches that of the initial equity loan - so, if you received an equity loan for 20% of the purchase price of your property, you must repay the same 20% of the proceeds of the house sale.
This is best illustrated with an example. If you buy a new build home for £200,000, with a 5% deposit of £10,000, the remainder of the purchase price is made up of a 20% equity loan of £40,000 and a 75% loan to value mortgage of £150,000. If you were then to sell that home at a later date for £250,000, that would be a 25% increase in the property’s value, and you would need to repay a total of £50,000 for the equity loan (£40,000 plus 25%). This is a simple illustration that doesn’t take into any previous repayments or additional interest after the first five years. If you want more detailed examples as to how this scheme might work for you, our mortgage advisers can help.
At the moment this scheme is available to current homeowners as well as first time buyers, provided that they have not previously used the scheme and already have a property sale in place. However, the Government has stated that it will restrict the Help to Buy equity loan scheme from 2021 to first time buyers who are buying newly built homes.
Help to Buy: ISAThe ISA scheme, which is only available until the end of November 2019, basically contributes 25% from the Government to any savings you put in - so if you save £200 a month, you get a further £50 on top. Plus, if you're looking at a joint mortgage, you can each apply for this scheme and get twice the boost. The maximum government contribution you can receive is £3000, so two individual ISAs could get you up to an extra £6000 towards a house deposit.
Once you are in a position to purchase your first home, your conveyancer or solicitor can apply for the government contribution on your behalf and it will be added to your funds at the completion of the purchase. It can’t be used for any other part of the costs associated with a house purchase, such as solicitor’s fees.
You can combine the various government schemes with the Help to Buy: ISA, including the Equity Loan scheme and Shared Ownership.
New build guarantor mortgagesYou may not be eligible for the government schemes outlined above - if that's the case, you may wish to look at a guarantor mortgage. This involves a family member or friend supplying funds on your behalf, or offering their own property (assuming that they have sufficient equity) as a guarantee.
If the guarantor puts up savings to secure your loan, they put a lump sum into an account with the mortgage lender and cannot touch it until a set amount has been paid off the mortgage, or for a certain number of years. The account will, however, usually gain interest in that time.
The guarantor is legally required to make the mortgage payments if you default. They must be able to provide proof to the lender that they can do this in addition to their own outgoings, and they must have a clean credit history.
The guarantor will be named on the title deeds, although they will not actually own a share of the property.
Springboard mortgagesThese mortgages are offered by some banks and are especially designed for first time buyers who may have small deposits. Whereas some first time buyers manage to get onto the property ladder thanks to a lump sum from parents ("the bank of mum and dad") or other family members, not all families can afford this option.
With a springboard mortgage scheme, you would provide a 5% deposit and a relative would put 10% of the house price into a savings account held by the mortgage lender. These savings are held as security against missed mortgage payments, and the funds can be released back to the relative after a set number of years, with accrued interest, provided that the mortgage is up to date.
For example, if you were buying a new build property for £250,000, you would supply a 5% deposit of £12,500, and borrow £237,500 on a 95% mortgage. Your parents or another family member would deposit £25,000 (10% of the property value) into the lender's savings account for a defined amount of time (usually 3 to 5 years), and are free to move the money after that if you have met all the mortgage conditions.
The advantage of both springboard and guarantor mortgages is that they could give you access to a wider range of lenders and more favourable new build mortgage rates than you might get with a standard 5% deposit and 95% loan to value. Speaking to a specialist first time buyer mortgage broker such as the Mortgage Hut may help to increase your chances of finding a favourable product along these lines.
Things to consider
Firstly, are you eligible? Most schemes have specific eligibility criteria, such as age range, household earnings, and the amount of deposit you need to provide. It’s also worth checking your credit history as that might affect the range of mortgages available to you. There may also be restrictions as to what you can do with the property after you've purchased it - for example, you cannot sublet a house bought with a Help to Buy equity loan, and you cannot sell or rent a Starter Homes scheme property for at least five years after purchase. If you're looking to buy a new build home to live in for the medium to long term, the government schemes currently available are definitely worth investigating.
Secondly, can you afford it? In addition to a deposit, you'll need to factor in moving costs and Stamp Duty and once you've bought your new build home, you'll be responsible for the monthly repayments. The Mortgage Hut's mortgage calculator can give you an instant idea as to how much you can borrow based on your total household annual income, as well as additional information such as estimated monthly payments.
How can you get started?
If you have more questions about the best scheme for you, and want to speak to an expert for the right advice regarding the new build mortgage options that are available for first time buyers, why not call The Mortgage Hut today on 02380 980304 or make an enquiry here.
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