With house prices rising faster than the average wage in many parts of the country, buying a property has never been so difficult.
Home buyers have long been advised to save as large a deposit as possible before buying a property. However, for many, saving such a large deposit can be extremely challenging.
Thankfully there are schemes available that can help people to purchase a property with a much smaller deposit, whether they’re a first time buyer or an existing home owner.
Help to Buy
To help those with dreams of home ownership to achieve their goal, in 2013 the government introduced the Help to Buy scheme.
The scheme enables buyers to purchase a home with as little as five per cent of the property’s value. Since the initiative is supported by the government, lenders are able to offer home buyers higher loan-to-value (LTV) mortgages.
There are a selection of options for home buyers to consider:
Help to Buy: mortgage guarantee scheme
The Help to Buy: mortgage guarantee enables buyers to take out a 95 per cent mortgage providing they’ve saved a five per cent deposit themselves. The initiative helps by reassuring lenders that if the buyer was to default on their mortgage, the government would step in and pay a percentage of the loan amount.
This scheme can be used by both first time buyers and existing home owners on any property up to the value of £600,000, regardless of whether it is a new build or not.
Help to Buy: equity loan
The Help to Buy: equity loan also allows home buyers to purchase a property with just a five per cent deposit. However, rather than guaranteeing to cover the lender’s losses, this option sees the government contribute 20 per cent towards the property while the lender provides a 75 per cent mortgage.
The buyer must repay the full 95 per cent mortgage over the course of their mortgage deal.
Since its introduction, the Help to Buy: mortgage guarantee scheme alone has helped more than 40,000 people to purchase a propertywith a smaller deposit than traditionally accepted.
For example, prospective buyers looking at properties in Manchester may be able to buy a home of their own with a deposit of just £8,260. This is based on an average property price of £165,213 in the city. In London, however, a typical five per cent deposit increases to £29,288, with the average property price in the capital at £585,765.
Help to Buy ISA
With the average house price in England and Wales currently standing at £180,252, for some people, saving a five per cent deposit for a house can still feel like an impossible task.
As a result, during this year’s Budget announcement chancellor, George Osborne revealed plans to introduce a Help to Buy ISA. The new account will help first time buyers to save a deposit by topping up their savings with government contributions.
For every £200 that a saver puts in the Help to Buy ISA each month, the government will reward them with an extra £50.
First-time buyers will be able to save up to £12,000 of their own money in the ISA, and once they are ready to purchase a property, the government will step in and top up their savings by 25 per cent. Those that save the full £12,000, will benefit from a £3000 boost from the government.
Some first time buyers may use the Help to Buy ISA to save a deposit, before using either the Help to Buy: mortgage guarantee or the Help to Buy: equity loan to purchase a property. However, the ISA can also be used by people who wish to save a larger deposit and purchase a property under a more traditional mortgage deal.
Buy now or save more
Some prospective home buyers can find themselves torn between saving up for a large deposit and buying a property as soon as possible.
For some, it may make sense to buy a property sooner rather than later with a small deposit, particularly if money is being spent each money paying rent to a landlord.
However, whether a potential buyer is renting or not, they may find themselves in a better position financially if they wait until they have saved a larger deposit.
A larger deposit could open buyers up to the following benefits:
- Increased chances of securing a mortgage
- Wider choice of mortgage deals
- Lower mortgage repayments
- Less risk
While lenders will conduct affordability checks before offering a mortgage in principle, it’s important for individuals to be realistic about the amount they can afford to repay each month. The initial repayments may appear manageable, but it’s vital that potential interest rate rises are taken into account.
Before deciding whether to buy now, or save more money, buyers should consider a number of factors such as:
- How much can they borrow based on their salary?
- Will monthly mortgage payments be manageable?
- Could interest rates rise or fall if they wait to buy?
- How long would it take to save a larger deposit?
Due to an ever-changing property market and interest rate fluctuations, there are no guarantees when buying a home. But by planning ahead to predict how each option could benefit them financially, buyers can increase the likelihood that their money is well spent.
Whether you’re a first time buyer or an existing home owner, for more information about residential mortgages, please don’t hesitate to get in touch with Aldermore Bank.
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