How to Get Onto the Property Ladder
Owning your own home may seem beyond your reach. But is it? With numerous schemes out there to give you a leg up onto the housing ladder, you may not be as far from having the keys to your own castle as you think.
1. Shared Ownership
Shared ownership schemes are provided through local housing associations. You buy a share of your home (25% to 75%) with a mortgage and pay a reduced rent on the remaining share. This makes home ownership more affordable as it reduces the amount required for a deposit and also the proportion of the property’s value needed as a mortgage. Under shared ownership you can only buy a new-build property or an existing shared ownership home. In theory, the combined monthly cost of mortgage plus rent should be about 80% of that of an equivalent home bought or rented privately. At any time you have the option to buy more shares in your home. This is known as staircasing and means that eventually you can own your home outright. When you sell a shared ownership property any profit – or loss – will be split between you and the housing association in proportion to the shares you each own.
Who can Benefit?
To buy through shared ownership you need to meet certain eligibility criteria. These vary between housing associations but are usually:
- A household income of £60,000 a year or less (£64,300 in London)
- You’re a first-time buyer
- Priority usually goes to people who rent a council or housing association property
What to Watch out For
In theory, shared ownership should be cheaper than buying property the traditional way. However, once you’ve added up the mortgage and rent the difference may be minimal. If you buy a flat another monthly cost will be the service charge. This covers maintenance of the communal parts of the building. It’s important to factor in service charges when working out if you can afford the property. Also bear in mind that you, not the housing association, will be responsible for 100% of the cost of maintaining the property. If you improve it – say by spending £10,000 on a new bathroom – you’ll eventually be sharing any resulting increase in the property’s value with the housing association. Not all mortgage lenders will lend on shared ownership properties and shared ownership mortgages are normally more expensive than best buy deals.
Shared ownership schemes are always leasehold, so buyers should ensure they know what owning a leasehold property entails. Leases will include clauses about what you can do to, and in, the property and, if you own a flat, rules you have to stick to (for example, not keeping bikes in the hallway or no pets.) Whether your shared ownership property is a house or flat, you won’t be allowed to sublet it. This means if your circumstances change – you move in with a partner or get a job abroad, for example – you won’t be able to rent out your property.
Finally, selling a shared ownership home may be difficult. When you sell the housing association has eight weeks to sell the home to people on its waiting list. After that you can market it yourself. Any profit you make will be split between you and the housing association in proportion to the shares you each own.
Find Out More
If you want to learn about shared ownership schemes in your area, contact your local agent.
2. Shared Equity
Shared equity is different to shared ownership. Under shared equity, you buy your home using a deposit (at least 5%), a mortgage, and an equity loan. Unlike shared ownership you will have control of your home and be free to sell it more easily but both the mortgage lender and equity loan provider will have a “charge” on it. This means that if you fall behind on your payments to either the mortgage company or the equity loan provider they can repossess your house. When a shared equity property is sold, the loan provider will be entitled to receive its share of the value (equity) of the property at the time of sale. For example, you might buy a £200,000 property with a £10,000 deposit (5%), £140,000 (70%) mortgage and £50,000 equity loan (25%). If you later sold the property for £300,000, the loan provider would receive £75,000 (25%) of the sale price.
3. Help to Buy
This is the latest government scheme to help get the property market moving. Under this scheme the government provides you with an equity loan to help you bump up your deposit. It's available to anyone wanting to buy a new build home (not just first-time buyers) for less than £600,000. As long as you have a 5% deposit the government will top that up to a maximum of 20% of the purchase price through an equity loan funded by the Government and the Homes and Communities Agency (HCA). For example, for a £200,000 property you could save a £10,000 (5%) deposit, get a £150,000 (75%) mortgage and a £40,000 (20%) equity loan. The equity loan is interest-free for five years. After that you’ll be charged a 1.75% fee per annum on the outstanding amount of the equity loan. From the fifth anniversary of the loan this fee will increase each year by the increase (if any) in the retail price index (RPI) plus 1%.
Disadvantages of Help To Buy
- Equity loans are only available on new build properties.
- After five years a fee of 1.75% will be levied on the Government loan, and this will then rise annually by the retail prices index (RPI) plus 1%.
- When you sell you won’t benefit from 100% of the profit if the property has risen in value as you’ll need to repay the Government the percentage it contributed.
- You won’t have a choice of all the mortgage lenders on the market as only some fo them have signed up to the help to buy scheme at this point.
How Can I Get One?
Help To Buy homes are available from house builders registered to take part in the scheme. You can find a list of participating house builders here.
4. Lender Schemes
Several mortgage lenders offer special mortgage deals aimed at helping people struggling to get on the property ladder. These include: Castle Trust Partnership Financial services company Castle Trust offers shared equity mortgages, but you’ll need a 20% deposit to be eligible. A “Partnership Mortgage” is provided by Castle Trust for 20% of the value of the home, with a normal mortgage taken out for the remaining 60%. There is no interest payable or monthly repayments on the 20% Partnership Mortgage. Instead when you sell the property you need to repay Castle Trust the amount borrowed, plus 40% of any increase in the value of the home. So, for every £1,000 of profit you make you would have to hand over £400 to Castle Trust. If the property has fallen in value when it’s sold, Castle Trust share 20% of the fall in value. With Castle Trust:
- You'll be able to qualify for a better mortgage rate as you'll have a much larger deposit, meaning your monthly mortgage payments will be lower.
- If your home goes up in value you could end up handing a lot of money back to Castle Trust.
Family Springboard Designed for borrowers with just a 5% deposit, Barclays allows any family member to put a further 10% of the property's purchase price into the bank's Helpful Start savings account where it earns interest at around 2%. So if you want to buy a property for £150,000, you need to raise a 5% deposit of £7,500. Your parents or relatives would then need to hold savings of £15,000 with the bank. As your deposit is now effectively 15%, you’ll have access to lower mortgage rates. Assuming repayments are made on time and certain criteria met, after three years the 10% deposit is released back to the family member, with interest added, and you continue with your mortgage. With Family Springboard:
- You get access to a lower mortgage rate without having to tie up someone else's money in your house, or borrow more.
- The interest rate paid in the linked savings account isn't table-topping.
Lloyds TSB Lend A Hand Also designed for borrowers with a 5% deposit, Lloyds TSB’s Lend A Hand mortgage requires family members to have savings of at least 20% of the property value. This means you will have access to mortgage deals normally only available to those with a 25% deposit. So for a property worth £150,000, you would need a 5% deposit of £7,500, while family members would need to put a minimum of £30,000 in the savings account. After the end of the 42-month fixed-rate savings period, as long as the value of the mortgage has dropped to 90% or less of the property’s value (either by paying it off or the property going up in value), family members can get their savings back plus at least 2.7% interest. With Lend a Hand:
- The savings rates are competitive and it will allow you access to lower mortgage rates
- Family members won't be able to access their money for three and a half years under any circumstances, and even then only if you have built up 10% equity in your home.