The trials and tribulations of a first-time buyer…

Written on 8 October 2013

I’ve recently started looking at buying my first home; my job is going well, rent is extortionate, and I'm fed up of magnolia paint, moving every 12 months, and being terrified to take a throw off of the landlord’s ill-thought-out cream sofa for fear my boyfriend will coat it in food and we have to say goodbye to our damage deposit.

Thoughtfully, the government is offering a lot of help to first-time buyers at the moment, and last week they brought forward the launch of the Help to Buy 2 scheme. The idea is, for houses costing up to £600k, the government will guarantee up to 15% of the house price while the buyer puts in a 5% cash deposit. The government is hoping that mortgage providers will be more willing to lend (up to) 95% mortgages if some of the house price is guaranteed in the event of default.  

As you might expect this follows the Help to Buy 1, launched earlier this year, but is not as similar as first appears. The initial scheme is restricted to new-builds from specific, government-registered developers. Rather than a guarantee, the government provides a loan of 20% of the house price, meaning with the 5% cash deposit a total of 25% will be put down. The loan is interest-free for the first 5 years, with the 6th year seeing interest of ~1.75% paid on 20% of the value of the property at this time.

These seemingly small differences lead to very different outcomes. With Help to Buy 2, the deposit is 5%, meaning interest rates are calculated on a Loan to Value (LTV) of 95% compared to the 75% of the original Help to Buy so ~5% will be paid compared to ~2.5% for the lower LTV.  The government will charge the lender a fee of ~£1,000 which will be passed onto the buyer either through specific charges or higher interest rates. For Help to Buy 1, the buyer will pay less interest but will lose a portion of the capital gains as the loan value is calculated as a percentage of home value therefore rising with the value of the house, eg. A buyer borrowing 20% from the government for a £600,000 home will initially owe £120,000 but will owe £126,000 if the house price rises to £630,000.

While both schemes enable more people to purchase their first home, neither is perfect. Help to Buy 2 could mean that buyers will have to pay high interest rates, yet the original scheme will be restricted to a new-build purchase and having to fork out ~£5,000 upfront for essentials such as flooring, washing machines etc.

So, these schemes are instigating many debates! Savills have controversially estimated that Help to Buy 2 will push house prices up even further (by almost 5% over the next three years until the scheme ends in 2017), making the house-price bubble issue worse!

It’s worth noting that on Help to Buy 1, the buyer is unable to sublet or purchase another property until the 20% from the government is repaid. It is possible to start paying off the government loan after the first year has passed, either in cash or by remortgaging the property.

So while they are trying to help with these schemes, it may surprise you to find I still have a bone to pick with the government: STAMP DUTY! Buyers of properties from £125,001 to £250,000 (not many of those in London, that's for sure) will pay 1%; £250,001 to £500,000 will pay 3% and £500,001 to £1,000,000 will be paying a whopping 4% for the privilege of buying a home. So if using the Help to Buy schemes to their maximum limit of a £600,000 property, £24,000 will be payable ON TOP of the deposit, legal fees, mortgage arrangement fees and financial advisory fees.  

Surely if the government is really trying to help first time buyers, they should be doing something about this tax which is likely to almost double the amount of cash the buyer will need upfront!

    COMMENTS

  1. Kayley Hackshaw on:

    You can only own the property that you are using either Help to Buy schemes on, so no, you are not able to own more than one property. If you do wish to buy another property once you have used the scheme, you will need to repay the government loan before you make the second purcahse.

    I guess the advantage of using the schemes is that if you cannot get together a bigger deposit, it means that you still have options to buy a property rather than having to wait to get on the ladder. If you have access to more cash upfront, it may not be the best for you and you may have more flexibility with buying a property without the government help.

    Kayley

  2. Edward on:

    OK thanks.

  3. Edward on:

    Hi Kayley, I thought student loans were not taken into account when applying for credit?

  4. Kayley Hackshaw on:

    Hi Edward,

    Any extra loans that you take out to pay for the stamp duty and extras will need to be disclosed when you are applying for the mortgage as they will count as liabilities and so it may limit the amount that you can borrow to a much lower amount. You will approximately be able to borrow (subject to good credit scores) 4.5 times your salary but any loans including student loan repayments will be taken into consideration when applying for a mortgage.

    Hope this helps – feel free to email me at kayley.hackshaw@wsm.co.uk

    Kayley

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