We recently read quite a disturbing article suggesting that 38% of surveyed people thought their best chance of getting on the property ladder was to rely on inheritance from their deceased parents!
You can’t blame these morbid people for thinking such dark and depressing thoughts – especially when you consider a statistic provided by the Office of National Statistics which indicates that the median price paid for residential property in England and Wales increased by 259% between 1997 and 2016, but median individual annual earnings only increased by 68% in the same time period! Holy fruit salad!
It represents the sad state of today’s economic climate, and it reminds us of the mountain that people have to climb in order to get on the property ladder. So instead of popping off your parents, we are going to explore some government schemes that enable hard-working people like you to buy your first home.
Help To Buy: Shared Ownership
The government offers shared ownership schemes to households who earn an income of less than £80,000 (£90,000 in London). You can buy between a 25% and 75% share of the property and pay rent to the housing association on the remainder.
There is the opportunity to buy more shares in the property at a later date, until you are the full owner – this is called ‘staircasing’ (the share price will depend on the property value at the time, which may go up or down).
If you wanted to sell your home, there is still potential to make a profit or a loss from the shares you own. And the housing association would have first refusal to buy them back.
Help to Buy: Equity Loan
With this scheme the government will lend you 20% (40% in London) of the value of the property, leaving the remaining 80% for your mortgage and deposit. There are a few notable ‘gotchas’ with this scheme that you should take note of:
- The scheme can only be used on new-build homes.
- There is a monthly management fee of £1 per month for the lifetime of the loan, and after 5 years the loan will incur a monthly interest charge which currently stands at 1.75%. This interest rate may rise with inflation each year.
- If you sell your home early, the amount of the loan you pay back will be proportional to the value of the sale value. By that, I mean if your property value has increased or decreased by 10% then so will the value of your total loan repayment proportionally.
- The loan has to be repaid within 25 years of purchasing the property. If you sell the property within this time frame, you will have to repay the loan.
Help To Buy: Individual Savings Account (ISA)
A help to buy ISA focuses on how to maximise your savings to build up a deposit for a mortgage. When you save money in this ISA (up to £200 per month) the government will contribute 25% to top up your savings.
In order to start receiving this bonus you need to save a minimum sum of £1,600, of which you would then receive a bonus of £400 directly from the government! (25% of £1,600 is £400).
In contrast to the 1990’s hit by 2 Unlimited, unfortunately this time there is a limit. The bonus contribution from the government is capped at £3,000, by which time you’d have £12,000 worth of savings (25% of £12,000 is…..you guessed it, £3,000!).
What’s great is that the government bonus is for each first time buyer, and not each household, meaning that if you’re a couple you can double your bonus!
“Money for old rope!” as my old man used to say, and a great saving scheme to get on the property ladder!
Right to Buy
If you’ve been a public sector tenant (council or housing association) for 3 or more years, this government scheme enables you to get on the property ladder by purchasing your home at a heavily discounted rate. The maximum discount is £78,600 (£104,900 in London) or 70% of the property value.
The longer you’ve lived at the property, the more discount you will get. For houses the initial discount is 35%. If you’ve lived at the property for more than 5 years the discount goes up by 1% each year.
Flats are slightly different. The initial discount stands at 50% and if you’ve lived at the property for more than 5 years the discount goes up by 2% each year.
The potential discount on offer could be huge, and this can help reduce your mortgage quite significantly.