End of Help to Buy: 10 alternatives for first-time buyers
The Help to Buy Equity Loan scheme was first introduced in 2013, though it has evolved over the years with the latest guise seeing the introduction of regional property price caps.
Essentially, it offered first-time buyers the chance to purchase a new-build property with a minimum 5% deposit. They could also use an equity loan of up to 20% of the purchase price – or 40% in London – where the loan is interest-free for the first five years. See YourMoney.com’s Help to Buy Equity Loan guide for more information on the now closed scheme.
Just over 361,000 properties were bought under the scheme, with the total value of equity loans totalling £22.5bn.
Mark Robinson, managing director at Albion Forest Mortgages, says he’s “amazed” the government “has not brought in a robust, widely available alternative to Help to Buy”.
Robinson said: “This is still needed in my opinion, and could leave some buyers short.”
While there are no comparable alternatives, here are 10 options and schemes now available to first-time buyers…
1) Bank of Mum and Dad
Advice firms are reporting that the current cost-of-living crisis means many parents have already gifted or are planning to gift cash to their children or grandchildren while they are still alive. One of the main reasons cited is to provide offspring with a house deposit.
The HomeOwners Alliance (HoA) explains that a ‘gifted deposit’ – unlike a loan – is given with the understanding that the money doesn’t need to be repaid. The person gifting the money has no right or legal interest in the property being bought.
Lenders may treat gifted deposits in different ways, for example only from immediate relatives, and a lender and conveyancer will need to know as part of anti-money laundering checks. You may need to sign a gifted deposit declaration.
By increasing the deposit put towards a property, you won’t need to borrow as much money and you may have a bigger choice of deals at cheaper rates.
However those gifting need to be aware of the inheritance tax rules. You can give away up to £3,000 a year, but allowances can be carried over from previous years (£12,000 total if no other gift has been made). But inheritance tax may loom for larger gifts and if the donor dies within seven years. The gift would form part of the estate and if it is worth more than £325,000, 40% tax is due on the excess.
2) Family Springboard Mortgage
If a cash gift isn’t an option, you could consider a Family Springboard Mortgage. These allow FTBs to get a mortgage without a deposit. Instead, parents pay a 10% deposit into a savings account linked to the mortgage.
As long as the child keeps up with repayments, the parents get their money back with interest.
As an example, Barclays’ 5 Year Fixed Family Springboard: Purchase Only is set at 6.20% (5.5% APRC) for a 95% LTV (minimum loan is £5,000, maximum is £500,000).
3) Guarantor Mortgages
With a Guarantor Mortgage, borrowers can usually take out a larger mortgage, even up to 100% of the property’s value. They are typically aimed at lower earners, those with smaller deposits, poor credit score or little to no credit history, HoA explains.
It means getting parents or a close relative involved who will take on some of the risk and cover any repayments missed by the buyer.
According to the HoA, this usually involves people offering their savings or their home as security, while not owning a share of the property as they won’t be named on the deeds. If the borrower is unable to repay, it could mean the guarantor loses their savings or even their own home, depending on what they used as security against the mortgage.
4) Shared ownership
Shared ownership lets FTBs purchase between 25% and 75% of a property and rent the rest from a housing association – increasing the stake they own over time in a process known as “staircasing”.
Angela Kerr, director of the HoA says that while shared ownership “is a good option for many, the homebuying mantra of ‘buyer beware’ couldn’t be more apt”.
She says: “Research every detail, read reviews and get a solicitor who can explain the contract. The details, costs and restrictions involved vary by provider so research each one on its individual merits and read the small print of your lease. Most notably staircasing to increase ownership in your property is expensive and time consuming.” See the HoA Shared ownership guide for more information.
5) First Homes scheme
Launched last year, the government’s First Homes scheme for local FTB and key workers aims to help people onto the property ladder with a minimum 30% discount on the market price of certain new builds. It requires a minimum 5% deposit (on the discounted purchase price) and is for those earning less than £80,000 per year (£90,000 in London).
The discounts will apply to homes in perpetuity. It applies to property worth up to £250,000 across England and £420,000 in London after the discount has been applied (or lower if set by the local authority).
It’s offered on a limited number of plots and 1,500 First Homes are expected to be rolled out over the first two years in over 100 locations. The government said First Homes should become available on new construction sites across England as developers and local authorities “begin to incorporate new planning policies”.
You should check whether the builder is offering the scheme on the development where you want to buy. There’s no application deadline.
Kerr says: “In June last year, the government amended its national planning policy to state that at least 25% of affordable homes delivered through the planning system should be First Homes. But we’re not clear what progress has been made to deliver against the scheme. The government was announcing new sites whenever they came online but it’s been quiet since 201 First Homes were announced in November last year in Hampshire. It really is a policy that’s trickle-feeding homes to a lucky few rather than one that will address the affordability issues faced by first-time buyers.”
6) Mortgage Guarantee scheme
The Mortgage Guarantee scheme was introduced in April 2021 to increase the availability of 95% loan-to-value mortgages after they were withdrawn during the pandemic.
It offers lenders the option to buy a guarantee on a mortgage where the borrower has a deposit of only 5% (maximum £600,00 property price). It compensates lenders for a portion of net losses suffered in the case of repossession. It’s not for new build properties.
Uptake of the scheme is low as it supported around £3.2bn in loans since launch, with the value of properties pegged at £3.42bn, and around 18,000 total completions.
The scheme is due to expire at the end of this year but reports surfaced last month that the former Chancellor, Kwasi Kwarteng, was in meetings with banking leaders to discuss its extension.
As an example, NatWest, RBS and Barclays offer the Mortgage Guarantee scheme.
7) Standard 95% mortgage/5% deposit lender deals
If you’re struggling to get a deposit together in the first place, lenders do offer 95% LTV mortgages meaning you just need to stump up a 5% deposit.
According to data site Moneyfacts, the number of 5% deposit deals from lenders has plummeted over the course of 2022, not helped by the disastrous effects of the mini Budget which sent markets (and mortgage rates) into a frenzy in September.
In January, there were 347 95% LTV deals, which dropped to 274 in September. In the aftermath of the budget, this number fell to 132 on 1 October and stood at 135 just over a week ago.
8) Deposit Unlock Scheme
Offered by the Home Builders Federation, the recently launched Deposit Unlock scheme allows FTBs and home movers to buy a new build home with a 5% deposit.
Under this scheme house builders pay to insure the mortgages instead of the government topping up a buyer’s ability to afford repayments with an equity loan.
According to the HoA, builders then use some of the money from selling the homes for this purpose with the aim of making lenders more comfortable about offering high LTV mortgages on new builds.
Kerr says Deposit Unlock “is quite a savvy scheme by developers” but adds it will “only appeal if homebuyers are struggling to get their own 95% mortgage and buy on the open market”.
Further, just three lenders are on board – Accord, Nationwide and Newcastle Building Society.
9) Longer mortgage term
Back in the summer, the government under Boris Johnson was reportedly looking at “creative” 50-year mortgage terms enabling people to borrow more and still afford repayments. But on the downside, it means people could be paying off their mortgage for most of their lives, with it being passed between generations.
While nothing’s come of this, borrowers typically opt for two, three, five or 10-year fixed mortgage deals.
Habito (Habito One) offers a 40-year term, allowing borrowers to fix their rate and monthly repayments for the entire term of the mortgage. Paula Higgins, chief executive of the HoA, says these longer mortgage terms “could also be an option for some”.
10) Play the waiting game and consider opening a Lifetime ISA
Kerr says that just as Help to Buy “had its shortcomings, so do all the alternative options now rising up to fill the gaps”.
She says: “Our advice to all first-time buyers is, if you can take a little longer to save, or are lucky enough to be able to leverage money from your family in some way, then do. It’s far better to buy a home on the open market than buy using one of these (often complicated and limited) purchasing schemes.”
However, she says for those who may sit back for now, opening a Lifetime ISA “is a no-brainer”. LISAs help people buy a first home or build a retirement pot.
They can be opened by people aged between 18 and 39 who can stash away up to £4,000 per tax year until they reach the age of 50. The money is topped up by a 25% government bonus each year, which means people can save up to £5,000 per year in a LISA plus potentially receive interest on their savings if using a cash LISA, or investment returns if they use a stocks and shares LISA.
“Watch for the parameters of the scheme, but if those limitations don’t pose a problem for you, then you really are benefiting from a significant bonus to your savings,” Kerr adds.
With experts predicting a house price fall in 2023, this could spur potential buyers to wait it out for a better, more affordable deal.
However, while buyers could wait to see if house prices fall, Richard Campo, founder of mortgage broker, Rose Capital Partners, says: “I believe there will only be a modest fall, particularly in London and the South East, which saw house prices shoot up post-Covid lockdowns. Any fall will more likely be a correction in the market rather than anything significant.”