First Time Buyer
First-time buyer savings schemes dwindle: your options now
The Help to Buy ISA shut to new entrants in November 2019 after four years of the scheme, which offered first-time buyers a government bonus of up to £3,000 to put towards a deposit for a home.
It was hugely popular, with the latest statistics revealing the bonus helped fund £48bn of property purchases with 280,000 completions taking place since December 2015.
While the closure of the Help to Buy ISA was well documented, other first-time buyer savings schemes quietly closed their doors to new entrants, meaning hopeful buyers now need to be savvier in building up a deposit at a time of record-low interest rates.
Nationwide’s Save to Buy account and Save to Buy mortgage range is due to close to existing members on 31 March this year, after closing to new business in November 2015.
This product offered savers 2% interest and gave them access to 95% LTV mortgages which weren’t initially available to all borrowers.
The Save to Buy scheme was superseded by the Help to Buy ISA. Nationwide revealed that in the week leading up to the closure of the Help to Buy ISA, it received 300,000 applications – almost 43% of all its current 700,000 Help to Buy ISA accounts.
Elsewhere, Virgin Money closed its Saving to Buy product in November 2019, the same time as the Help to Buy ISA. Launched in 2016, it was a ‘companion product’ for the ISA and paid 1%. Existing customers can continue to use their account as normal, however.
The Loughborough Building Society also closed its Save to Buy account paying 3% on monthly deposits of between £50 and £500 up to £24,000 in September 2019. This product initially launched in July 2018 with a rate of 1.5% before it was doubled in March 2019.
Are similar savings schemes available?
A handful of similar savings schemes are still open but they are only available to people in certain parts of the UK.
The Vernon Building Society’s Regular Saver ISA pays 1.95% on up to £25,000 and 1.45% for amounts above this. It allows a maximum of two withdrawals per tax year and also offers a maximum £1,000 for a first-time buyer completing a mortgage with the lender.
However, it is only available to customers who live within a 25-mile radius of Stockport as it looks to “promote its commitment to the local community”.
Principality’s First Home Steps scheme offers a tiered interest rate – 1-2% on up to £25,000 – and allows three withdrawals per calendar year. It’s available in branch or agency (17 counters at estate agents) in Wales and the borders.
Savers also receive a £500 cash bonus when taking out a mortgage with the lender. The maximum that can be saved each month is £1,500 and after five years, it will revert to an instant access account.
Rachel Springall, finance expert at data site Moneyfacts, said: “It is such a shame there are few savings accounts designed to help would-be first time buyers with an incentive to save – especially now that the Help to Buy ISAs are closed for new investors and that there are very few cash Lifetime ISAs available for savers to choose from. There used to be many more accounts out there, but they have dwindled over the years.”
Alternatives for first-time buyers
With the withdrawal of the Help to Buy ISA, the only first-time buyer scheme in the same league is the Lifetime ISA (LISA), which allows people aged 18-39 to save up to £4,000 each tax year towards a property or pension. The amount receives a 25% government bonus – up to £1,000 a year.
Money can only be withdrawn free of charge when the account holder buys their first home or reaches the age of 60. Any other withdrawals are subject to a 25% penalty on the whole amount (including own contributions and the government bonus) meaning they could be left with less money than they started with. See YourMoney.com’s Lifetime ISA guide for more information on the scheme.
Ray Boulger, senior mortgage technical manager at broker John Charcol, says the 25% bonus paid by the government on the amount saved dwarfs the amount which can be made safely on any alternative savings scheme.
“If a couple are planning to buy together, they can both use the 25% bonus for all or part of their deposit,” he adds.
Another option for first-time buyers is to look for 100% LTV-type mortgages.
Although there are no pure 100% LTV deals available on the market – meaning potential buyers do need to save for a decent deposit – there are a number of lenders offering first-time buyer-type deals.
These guarantor-type deals can be broadly put in four categories:
- Savings deposit of 10-20%, usually from a family member(s), where the saver earns interest for a fixed term (typically five years), facilitating a 95% or 100% LTV mortgage.
- Family offset mortgage: a savings deposit, usually 20% from a family member(s), facilitates a 95% LTV mortgage, but there’s no interest paid from the lender to the saver. Further, the lender charges interest on the net mortgage amount after offsetting the savings balance. This is particularly useful if the saver is a higher rate taxpayer.
- Lender taking a charge (first or second) on a parent or grandparent’s property to provide extra security for a 95% or 100% mortgage on the first-time buyer purchase. Only a few lenders offer this type of mortgage and as well as being more complicated, they tend to be more expensive than alternatives so they’re rarely recommended.
- Sole Proprietor/Joint Borrower: traditional guarantor mortgages have almost disappeared and these have taken over, largely because of the additional 3% stamp duty surcharge on second properties. Before the surcharge, where a parent’s income was needed to boost affordability, this could be done without adverse tax complications by purchasing the property with their child on a tenants in common basis with the child owning 99% and the parent 1%. As the mortgage was a joint and several liability, the lender would take both incomes into account but a 1% ownership was unlikely to have any Capital Gains Tax implications for the parent. Now that the 3% stamp duty surcharge has killed this way of helping a child, the Sole Proprietor/Joint Borrower option addresses the problem.
Of the mortgages requiring a family savings deposit, Barclays Springboard is the market leader for two reasons, according to Boulger.
“It offers a 100% LTV option and only requires a 10% savings deposit (most lenders require 20%). The 100% LTV rate is 2.95% fixed for five years (2.75% at 95%) with a maximum term of 35 years, which in some cases will be useful to meet the lender’s affordability test, even if the FTB might have preferred a shorter term.
“However, if the FTB has other more expensive unsecured borrowing, the longer term will free up cash to focus on repaying more expensive debt first and when that has been cleared, overpayments can be made on the mortgage, which will have the effect of both increasing equity and reducing the remaining term,” he says.
Boulger adds that another option that has the same effect as an LTV in excess of 95% is a deal offering large cashback. On lower value properties, this has a bigger percentage impact.
“For example, Furness Building Society has a 95% LTV two-year discount mortgage with an initial rate of 2.99%, no arrangement fee and £1,500 cashback. On a £100,000 property this is effectively equivalent to a 96.5% mortgage. The borrower is effectively paying for the cashback with a higher rate but if finding the deposit is the biggest barrier to buying their property, this could be a reasonable trade off,” he says.
Buyers may also want to consider shared ownership or help to buy loans. See our guide for more information.