Stratospheric house price increases over the last year may have had some homeowners rubbing their hands in glee, but that’s not the case for first-time buyers.
With an average increase of £23,600 since June 2020 according to Halifax data, many are finding that the home ownership dream is running away from them – especially as price growth is out of kilter with wages.
For those that do not have high salaries, or families with large sums of cash to gift them, raising a deposit is often one of the biggest challenges.
The financial sector has recognised this and cooked up a series of products to help first-time buyers get together that crucial lump sum, but what are they and is taking one a wise move?
Deposit lending schemes can help first-time buyers raise enough money to purchase their home – but they can also come with hefty interest charges
Deposits matter, as they get you a better mortgage rate and protect you from negative equity.
‘For anyone looking to purchase their first home the more savings they have to put down as a deposit the better, as the lower the loan-to-value ratio, the lower the interest rate, and the lower the risk of negative equity,’ says Katie Brain, consumer banking expert at financial information business Defaqto.
‘But with house prices at a high level it can be very difficult for people to save enough, especially if they are also paying for rent or live on their own.
‘Thankfully there are various mortgage and government schemes to help first time buyers.’
The latest scheme, Ahauz, launched recently. It offers first-time buyers an equity loan of up to 25 per cent of their property’s value, which they can combine with their existing deposit to get a better mortgage deal and cheaper monthly repayments – as well as potentially helping them to meet their bank’s criteria around maximum borrowing based on salary.
Interest on the loan is charged at a fairly hefty 6.99 per cent, however.
Taking a loan or other help will always end up being more expensive than saving up the old-fashioned way – but for some it may be preferable to more years of renting and saving.
So what are the different options, and what do buyers need to be aware of when considering them?
We run the rule over what is on the market right now.
Unlike Help to Buy, Ahauz can be used on period properties and not just new builds
What is it? Ahauz offers an equity loan to first-time buyers, which they can use to boost their deposit. This, in theory, allows them to get a better mortgage rate and potentially a bigger home than they could otherwise afford.
The company will lend the buyer up to 25 per cent of a property’s value, but the buyer will themselves need to put down 5 per cent.
Interest on the loan, which is a second charge mortgage, is paid monthly, on top of the primary mortgage payments.
Buyers have their whole first charge mortgage term – usually 25 to 40 years – to pay back the balance of the loan.
The loan is based on the home’s value, so if they borrowed 20 per cent of a home’s value today, they would pay back 20 per cent of its value on the day they repaid – whether that figure had gone up or down.
They could pay it back from the proceeds of the home when they eventually sell it.
But they can also pay it back early with no penalty charges. The earlier they pay it back, the less interest they pay.
First-time buyers could possibly afford a better home if they borrowed some money to add to their deposit – but they need to weigh up whether interest charges are worth it
Watch out for: The interest on the loan is charged at a minimum of 6.99 per cent. This is substantially more than typical mortgage rates, which can be as low as 0.94 per cent for someone with a 70 per cent deposit. The company justifies this by saying:
‘Although this rate is higher than typical mortgage rates, it only applies on the smaller Ahauz loan, bringing the blended rate of the primary mortgage and Ahauz’s loan down to less than 2.9 per cent’
This figure is an example, based on a 75 per cent loan-to-value mortgage at a rate of 1.3 per cent, and a 20 per cent loan from Ahauz. The rate would depend on the exact rate of the mortgage secured.
At the moment, the lowest rate available on a 5 per cent deposit mortgage is 2.74 per cent, though it comes with a £900 fee.
With mainstream mortgage rates potentially in the same ballpark as the ‘blended’ rate, the main advantage of using a scheme like Ahauz would be to improve your loan-to-income ratio and get a more expensive home than you would otherwise be able to afford.
The interest on the equity loan could also change. The Ahauz equity loan is a 5-year fixed interest rate product, moving to a variable rate after that. The variable rate is linked to the Bank of England base rate, so will rise if that rises.
Expert verdict: The key issue for borrowers using schemes like Ahauz is whether their mortgage lender will view the equity loan in the same way that they would view a cash deposit.
Martin van der Heijden, chief financial officer at Habito, says: ‘There may be a smaller effect on how much people can borrow than the company’s example suggests.
‘Lenders will consider the scheme a loan and apply rules about how much total borrowing is considered safe and affordable, impacting how much you can spend on a home.
‘When it comes to what mortgage rates they can get, lenders may also consider a borrower just as ‘likely to walk away’ as someone with a 5 per cent deposit, and may not treat these applicants the same as someone with a high deposit in cash.’
What is it? Like Ahauz, Proportunity offers first-time buyers an equity loan of up to 25 per cent or a maxiumum of £150,000, to help them on to the property ladder.
Rates on the equity loan range from 8.49 per cent if you pay a £499 fee, to 9.99 per cent with no fee. Again, this is much higher than the typical mortgage rate.
Both Proportunity and Ahauz work in a similar way to the Government’s Help to Buy scheme – except the interest is charged every month, from the time you take out the loan, whereas Help to Buy defers it for five years.
But these private schemes allow you to buy a much wider range of properties, while Help to Buy is restricted to new builds.
Watch out for: Proportunity charges an early repayment fee if you repay the loan within the first five years. It reduces by 1 per cent every year, from 5 per cent of the total loan in year 1 to 1 per cent in year 5.
Like Ahauz, the interest rate becomes variable after year five, so payments could increase.
Expert view: Again, experts point out that a mortgage lender might not view the money you borrow from Proportunity in the same way as money you hold in cash – and the future interest payments on the loan could impact your affordability assessment.
Word of warning: Experts say that borrowing a deposit, rather than saving one, can impact the way a potential mortgage customer is viewed by their lender
Mark Harris, chief executive of SPF Capital Partners, says: ‘Where there is a cost, the first-charge lender will take this into account, which will affect affordability and the size of mortgage the borrower can get.
‘Also, check the terms and conditions for any penalties, such as exiting the scheme or if house prices fall.’
Matt Coulson, founder of broker Heron Financial, adds: ‘With the various deposit loan schemes there are limitations, given that many mortgage lenders would not be happy with a client taking a loan to supplement their deposit.
‘Lenders generally like to see that the client is making some kind of contribution of their own, so this can be problematic from a lending point of view.
‘This means that borrowers will not be able to access all products on the market and may have difficulty getting a mortgage with a mainstream lender.’
Help to Buy
While Ahauz and Proportunity can be used on any kind of property, the Government Help to Buy: Equity Loan scheme is restricted to new-build homes.
The Government lends a first-time buyer up to 20 per cent of the purchase price of a new build home interest-free for five years.
In London, loans can be up to 40 per cent of the purchase price due to higher property values.
Recent Government figures show that 21,000 homes were bought with one of the Government-backed loans between October and December 2020, a rise of 40 per cent compared to the same period in 2019.
On the ladder: The Government’s Help to Buy scheme loans first-time buyers up to 20% of their home’s value interest-free – but interest charges kick in after five years
However, its terms are generally better than the private schemes. While Ahauz and Proportunity charge interest from the get-go, Help to Buy is interest-free for five years.
That said, payments can quickly spiral. The interest rate starts at 1.75 per cent in year six, and after that it rises in line with the Retail Price Index measure of inflation plus 1 per cent each year.
For someone who bought a £200,000 home with a 20 per cent (£40,000) Help to Buy equity loan, they would pay just a £12 management fee each year in years one to five. But in year six that would rise to £712, and in year 10 to £896 – on top of mortgage payments.
Watch out for: Many borrowers remortgage away from Help to Buy before the interest repayments kick in, and use the equity they have built up to repay the Government – but if house prices fall, this becomes tricky.
If that happened, buyers could potentially be stuck making the interest payments until they had enough money to repay the loan.
New Help to Buy restrictions were also introduced in April 2021. Since then, Help to Buy has only been open to first time buyers, and price caps were also introduced by region, making property choices more restricted.
There is only a limited time left to apply, as the scheme closes for good in 2023.
Expert view: One of the problems with Help to Buy is that it can only be used on new-build homes that are registered with the scheme. This restricts not only the choice of properties, but also mortgage options.
Harris says: ‘With government schemes there are limited lender or product options. They are also limited to new-build properties, so can’t be used to purchase older housing stock.
‘Loan repayments after five years are not fixed and may become quite expensive.’
This Government scheme is in its very early stages with the first homes only just launched.
It allows first-time buyers to purchase properties at a discount of a third, and doesn’t involve any extra borrowing on top of their mortgage – but the criteria for applying are strict.
The properties are built and marketed by house builders in the same way as any other new builds, but must be sold to buyers with at least a 30 per cent discount on their market value.
If local councils approve it, that discount could be increased to 50 per cent.
The purchasers of First Homes will need to be first-time buyers, and their household income should not be more than £80,000, or £90,000 in Greater London.
There is a value cap on the homes, too – and it is relatively low. The most expensive properties available under First Homes will be £420,000 in London and £250,000 in the rest of England.
First Homes will offer discounted properties, but many first-time buyers won’t meet criteria
Watch out for: The eligibility criteria for First Homes is fairly restrictive. Applicants will usually need to live, work or have another connection, such as family members, in the area where they want to buy their home.
There might also be extra criteria depending on where they live, because local councils are allowed to apply additional rules. For example, they might lower the maximum household income, or give priority to key workers.
It might also be difficult to sell the property, as it must be sold to another eligible First Homes buyer.
And as the home is sold below market value, the existing buyer might struggle to move up the ladder.
If you have family who can’t give you the money for a deposit outright, but are willing to act as a guarantor, or put their home or savings up as a security, there are several options.
Guarantor mortgages, also known as ‘family assist’ mortgages, are when parents, or other close family members, agree to use their home or savings as collateral to help a first-time buyer purchase a home.
This means that, if the new home buyer can’t pay their mortgage, they will be jointly liable for any extra costs after the home has been repossessed and sold.
Guarantor mortgages: It is crucial that parents understand what they are signing up for
These are offered by a number of lenders, and often mean that the buyer can borrow the entire purchase price and don’t need a deposit.
But in exchange, their family members will need to put a certain percentage of the home’s value – commonly 10 to 20 per cent – in a linked savings account, or accept the same charge on their own home.
Watch out for: All parties should be clear about what they are signing up to – and discuss what would happen if relationships broke down. Most lenders require that the family members take legal advice before signing up.
There could also be stamp duty implications. Says Harris: ‘If you opt for a guarantor mortgage, and the guarantor goes on the deeds, then the transaction may fall foul of additional stamp duty.
‘This may mean a 3 per cent surcharge is payable because the parent already owns another property so the purchase is deemed to be a second home.’
Finally, many mortgage lenders have an upper limit on the age of customers they lend mortgages to. This could affect the family’s ability to borrow, or the length of the mortgage term that can be taken out.
Expert view: Brain says: ‘If close family members are able to help financially and are willing to either add a collateral charge to their existing property or provide a savings deposit there are several providers Barclays, Lloyds and Halifax to name a few, who offer specific products at competitive rates.
‘With all of these options which involve financial involvement of family members there is a certain level of risk to the family member, so professional advice should always be sought to find the best solution for the individual circumstances.’
Tembo, which describes itself as a ‘family lending platform,’ enables first-time buyers to get on the housing ladder by brokering a small interest-only mortgage on their parents’ – or another family member or friend’s – home.
Again, this requires financial support from parents, but it could cost them far less than gifting an entire deposit.
The money from the benefactor – which Tembo refers to as the ‘homebooster’ – is then put towards the child’s mortgage deposit, allowing them to buy their first property.
Adding extra money to a deposit often results in a lower mortgage interest rate – but this needs to be compared against any interest charges related to the deposit boosting scheme
Watch out for: As with any mortgage, the parents’ home could be repossessed if they do not keep up repayments – and if the parent wants to move, they will need to repay the loan from the proceeds of the sale.
Parents will need to pay interest on the new loan every month, but Tembo says many buyers are offering to cover these costs themselves, along with the repayments on their own mortgage.
It will recommend that family members take out mortgages where the balance doesn’t have to be paid off until either the property is sold or the family member dies.
Expert view: Harris says: ‘Another option is for parents to release equity from their home to help offspring onto the housing ladder.
‘However, parents should seek independent legal advice before committing to this and consider what might happen should the family relationship break down.
‘The parents’ home may also be at risk if the child doesn’t pay the mortgage, and it may also restrict what parents wish to do in later life – such as selling up and moving abroad or funding a holiday home. There are also limited lender and product options so the rates may not be that competitive.’