With the government’s Help to Buy ISA scheme coming to an end imminently, there is a lot of press coverage about it and the replacement Lifetime Isa. But what alternatives are available? Ashley Jones, Residential Consultant, explains...
The Help to Buy ISA scheme is on the way out, meaning you won't be able to open a new Help to Buy ISA after midnight on Saturday, 30th November. For some, the new Lifetime ISA will be a good option, but what alternatives are there to saving plans? The good news is that there are many options to consider, including Shared Equity, Shared Ownership, Family Assistance schemes and Joint Borrower, Sole Proprietor.
Help to Buy – Shared Equity
The Help to Buy scheme is only available on new build homes but allows buyers to put down as little as 5% deposit. The government then provides a 20% equity loan (40% for London purchases), which is interest-free for the first 5 years and then charged at RPI (Retail Price Index) thereafter. The rest of the funds must be raised through a mortgage by the buyers.
- The key benefit of this scheme is that it minimises the amount of deposit needed to purchase, which is often the main barrier, especially for first-time buyers.
- It’s also available to home-movers, not just first-time buyers, as long as they only own one property upon completion.
- There is a maximum purchase price of £600,000, which is considerably more generous than the Help to Buy ISA purchase limit but, on the reverse, this may be restrictive for those purchasing in expensive areas like London.
- The scheme is only available on new build properties, which restricts the buyer’s choices.
- Lenders assume that when remortgaging after the initial 5 years, borrowers will be earning more so can raise the capital through the remortgage to pay off the equity loan. If this isn’t the case they will be charged interest on the loan.
Shared Ownership schemes are usually run by the local authority or a housing association, allowing buyers to purchase a percentage stake of the property (between 25%-75% of the home’s values) and pay rent for the rest. Many housing associations offering “staircasing”, which allows the buyer to purchase a bigger share of the property later on when they can afford to.
- This drastically reduces the amount of deposit required, with some only requiring 5% of the 25% purchase price. So, while you may require a 95% mortgage, the loan amount is going to be far lower, and therefore more affordable, than if you were purchasing 100% of the property.
- Properties which offer shared ownership as a purchase option are highly sought after and can be difficult to find. They are also usually flats, which can be restricting for those looking to buy.
- Selling on shared ownership properties, while popular, can be more difficult as it is a specialist market compared to a conventional sale.
- Some housing associations require you to sell the property back to them if you want to move.
Family Assistance Mortgages
Family Assistance mortgages are a direct result of the increase in parents gifting their savings to help their children raise enough money for a deposit on a purchase. Rather than having to gift the funds required for a 10% deposit, these schemes allow parents to place the money in a special savings account which they will get back at the end of a 3 or 5-year term, plus interest. The buyers can then apply for a 100% or 95% mortgage, depending on the lender.
- The major benefit of these products is that the “helpers”, whose money is used as a guarantee, not only get their money back (if mortgage repayments are kept up), but they earn interest on it at the same time! Depending on the product, this can be as much as 2.25%* - higher than most savings accounts on offer at the moment.
- Despite the financial investment from a third party, only those named on the mortgage have legal ownership of the property, which prevents things from getting overly complicated.
- The buyers benefit from a fixed mortgage rate, meaning that their repayments remain the same throughout the initial term.
- Available to first-time buyers and home-movers
- If the buyers default on the mortgage repayments, the helpers are at risk of losing their money.
- The helpers cannot access their savings until the end of the initial term, which may be a risk to the helpers.
- The helpers must provide a 10% deposit, which still makes it unachievable for many.
- At the moment, these schemes cannot be used on new build properties as lenders view these at a higher risk of going into negative equity. (New builds are often sold at a premium price which is more likely to devalue, compared to an older property.)
- While some of these products are offered to everyone, some require you to hold a current account with the bank to be eligible for the mortgage.
Joint Borrower, Sole Proprietor
The concept of these products is that the borrower’s mortgage has a guarantor, usually a close family member like their parents, who takes joint responsibility for the mortgage repayments and charges. This enables the borrower to have full ownership of the property while benefitting from financial assistance. There are a growing number of lender’s offering this type of mortgage, with a typical loan to value (LTV) starting from 90%.
- Can allow the borrower to afford a larger mortgage than they would have on their own.
- Even if the guarantor owns their own property, this arrangement won't incur additional stamp duty charges on the purchase
- While predominantly for first time buyers, lenders do offer them to home movers, especially those down-sizing later in life.
- Some lenders do impose restrictions on who the guarantor can be and will insist that they are a close family relation. They may also have age restrictions for the guarantor.
- Lenders will consider the guarantor’s existing commitments when assessing affordability – so if this changes it may affect the mortgage.
As you can see there are still plenty of alternative options available to those who may need some help getting on the property ladder, and even those who are taking the next step. If you’d like to discuss any of the above and see what rates may be available to you, please do not hesitate to contact me, Ashley Jones, on 01732 471694 or email me firstname.lastname@example.org.
*Interest rate as at 25/11/2019. You can read more about this product in our recent article.