What the Budget Means for First Time Property Buyers
With yesterday’s Budget announcement came a raft of extensions, new schemes, financial support initiatives and tax allowance freezes. To help decipher the information, we’ve recapped here which news is relevant to first time property buyers and what it means for your opportunity to make 2021 the year to purchase your first property!
As West Sussex property experts, we’re always on hand if you need tailored guidance to help with your search – and there are multiple schemes out there designed to make it possible to move onto the property ladder.
If you have further questions that we haven’t covered here or would like some advice with your property search, do get in touch with the Tod Anstee team.
Let’s work through the new announcements and some of the pre-existing programmes that might be interesting to consider.
The New Government Mortgage Guarantee Scheme
The big news for first-time buyers is the new mortgage guarantee scheme.
One of the Coronavirus pandemic impacts is that far fewer lenders have been offering high LTV mortgages. LTV stands for Loan to Value and is the ratio between the size of the mortgage and the value of the property in question.
There are several reasons it can be hard to purchase your first property, not least saving up a substantial enough deposit – with most mortgage lenders needing 5% as an absolute minimum. However, even with this deposit, first-time buyers won’t have access to the most competitive mortgage terms and may find it tricky to be approved for a mortgage, given how few lenders will offer a 95% home loan.
To help solve the problem, the government is now offering a mortgage guarantee, whereby it will secure up to 95% of the loan value. This substantially reduces the risk to lenders and hopefully means that there will be more mortgage providers out there offering exciting deals for first time buyers.
Here’s how it works:
- Applicants will still need to have the minimum 5% deposit to put down.
- Guarantees will be available for buyers looking to purchase a property between 91% and 95% of the value.
- Lenders will be guaranteed compensation for losses and some costs should the buyer not keep up with their mortgage repayments.
- The same affordability and eligibility criteria will apply, with residential mortgages regulated by the FCA, to ensure banks aren’t lending irresponsibly.
- Guarantees will last for up to seven years from the mortgage start date.
Mortgage guarantees were previously available through the Help to Buy scheme (we’ll touch on that later) – but were discontinued in 2016. This new initiative aims to help thousands of first-time buyers make their dream of owning a property a reality. Property values are capped at £600,000, and eligible mortgages must be on a repayment basis rather than interest-only.
The mortgage guarantee scheme will launch in April 2021 and is expected to run until December 2022. Therefore, new buyers have just over a year and a half to apply.
Buyer Eligibility for the Mortgage Guarantee Scheme
There are a few criteria to qualify for the government guarantee.
This isn’t solely available to first-time buyers, although this is one of the largest groups likely to benefit. Any household can apply if they aren’t able to find a mortgage or offer additional security or guarantors as required by many lenders.
The rules are as follows:
- The property must be a residential home and cannot be a rental investment or a second home.
- Applicants must be individuals, so the scheme isn’t open to commercial mortgages.
- Eligible properties must be in the UK and valued up to £600,000.
- The LTV ratio must be between 91-95% (so a 5-9% deposit is required).
- Mortgage applications must be made between April 2021 and December 2022.
- The mortgage product must be on a capital repayment basis.
- Lenders must only offer products with the government guarantee if their standard credit scoring and debt to income ratio criteria are met.
Mortgage providers also have some additional rules to follow. One of the participation terms is that they must offer a fixed-term five-year interest deal as one of the optional mortgage products to choose from.
Stamp Duty Holidays Extended to October 2021
In other news, the Stamp Duty holiday has been extended, following intense speculation over the last few weeks.
Currently, the Stamp Duty threshold has risen from £125,000 to £500,000. While this threshold was due to revert on 31st March 2021, it will now remain until June. From July, Stamp Duty is payable on properties costing from £250,000, and then from October 2021, the original £500,000 threshold will apply.
Note that first-time buyers have an exemption on Stamp Duty for any property costing under £300,000, and this is expected to remain the case even with the general threshold changing over the coming months.
Other First-Time Buyer Support Programmes
Alongside the new mortgage guarantee scheme, there are other initiatives already in place that can be a lifeline for first-time buyers who cannot save a sufficient deposit to qualify for the best mortgage rates – or are finding it hard to be approved at all.
The Help to Buy equity scheme continues to run until 2023 and is only open to first time buyers purchasing new build properties.
You can apply for an equity loan, held as a stake in your new property, up to 20% of the value. There remains a minimum 5% deposit requirement.
This loan is interest-free for five years. After that, you can remortgage to repay the loan (calculated as 20% of the current property valuation) or begin to pay interest. The idea is to offer a 25% deposit against a property – therefore qualifying with far more mortgage lenders and being eligible for the more competitive interest rates.
While the Help to Buy ISA scheme no longer exists, a Lifetime ISA is another savings solution worth considering when working on building up a deposit.
These individual savings accounts have a contribution limit of £4,000 per year. For every deposit you make, the government will top up your savings by 25%, up to £1,000 per year.
We have collated this information in the hope that it will prove useful in understanding what the mortgage guarantee scheme is and why the 2021 Budget announcements should make it easier for first time buyers to invest in a new home.
If you are interested in understanding what sort of properties are currently on the West Sussex market within your budget or expanding your property search in line with your mortgage affordability, do get in touch, and we will be delighted to help.