With the number of first time buyers currently reaching a ten year high, it’s clear that first time buyers are taking advantage of the schemes and discounts on offer, in an effort to get on the ladder. But with opportunity comes confusion – which schemes apply to you, can any of them be used in conjunction with each other, and are they the best choice for everyone?
Saving for the deposit
There are two ISA options for first time buyers looking to make money whilst saving their deposit and, in both, the government reward you for saving. But the two different options have their positives and negatives.
Help to buy ISAs
A Help to Buy ISA is designed to help you save for your deposit. You can put a lump sum of £1000 in upon opening the account, but then you’re limited to putting in £200 per month. When you reach £1600 saved, you’ll receive the minimum bonus of £400. If you carry on saving up to the £12000 threshold, you’ll receive the maximum government top up of £3000.
Whilst the free money is great, the problem with this account is that it can only be accessed by your conveyancing solicitor once you’re in the process of buying a home, which isn’t necessarily helpful if you want to use the money for a deposit.
There is also a limitation on the price of the house you can use the deposit on, with a £250,000 limit in the UK, and a £450,000 limit in London.
On the plus side, if you’re saving with a partner, they can have their own Help to Buy ISA, meaning you could get £6000 completely free from the government just by saving in this account.
Advantages: free money, monthly saving, each partner can have one.
Disadvantages: property price cap, can’t use towards deposit, only saving £200 per month means getting the total top up would take 5 years.
A Lifetime ISA is for people over 18 but under 40. It can be used to save for a deposit on a property, but it can also be used as tax free savings in retirement. You can pay up to £4000 a year up until the age of 50, and it can be used on a property of any value. You will receive a 25% bonus on whatever you have saved and this is paid directly into the account at the end of the tax year, unlike the Help to Buy ISA, where it is only available at the closing of the account.
Lifetime ISAs are a good choice for those who are saving over a longer time period, and if you want to pay in lump sums sporadically. If you are buying with a partner, you can both have one, and as the bonus is paid in yearly, you can access it ahead of time and it can be used as a deposit.
Bear in mind if you decide to withdraw the money from your Lifetime ISA and it’s not for a property purchase, or you’re not over 60, you will lose out on the bonus and possibly end up getting back less than you paid in.
Advantages: can pay in up to £4000 a year, can both have one, no property price limit, bonus paid annually.
Disadvantages: currently few providers to choose from, only available to those aged 18-40.
Buying a new build
In attempts to support first time buyers, and provide enough housing, the government has approved a scheme where they will help provide equity towards a new build home. This is what ‘help to buy’ means when it is promoted by developers or is said to be available on new homes.
Help to Buy Equity Loan
The help to buy equity loan is available to first time buyers looking to buy a new build property. If you only have a 5% deposit, you can still buy, as the government will lend you up to 20% to help you make up the amount to your mortgage.
Property price – £200,000
Deposit – £10,000
Equity loan – £40,000
Mortgage – £150,000
The equity loan helps those with a lower deposit. The loan is only available on properties up to £600,000, and the percentage of loan available is increased to 40% for London. You do not pay anything back on the equity loan for 5 years (apart from a £1 a month account fee) but after 5 years you are required to start paying the interest on the loan. This will start at 1.75% of the loan amount and will increase by one per cent each year, linked to inflation. You could also attempt to pay off the loan itself, or you could hand over 20% the value of your property when you sell it.
You apply for the scheme through a local Help to Buy agent.
Advantages: buy a home with small deposit, no interest for 5 years.
Disadvantages: prices often inflated, new builds don’t increase as much in value so you could be left with negative equity when selling, paying back loan interest on top of mortgage.
As of November 2017, first time buyers are exempt from paying Stamp Duty, with certain conditions. First time buyers won’t pay Stamp Duty at all on properties up to £300,000, or on the first £300,000 on a property up to £500,000. This could save first time buyers a few thousand pounds, depending on the price of their property. There has been some criticism that it doesn’t really help those living in London, as first time buyers choosing a property over £500,000 will get no exemption at all.
You don’t have to do anything to get the Stamp Duty exemption, it will be automatically deducted. However, make sure you fit the first time buyer criteria for Stamp Duty:
- You must never have owned a home before, either in the UK or abroad.
- If you’re buying with someone else, they also have to be a first time buyer for you to qualify.
- You have to be planning to live in your home (not renting it out) but you can own commercial property and still qualify.
Choosing which schemes to take advantage of can be confusing. Always make sure you are getting the most for your money when saving a deposit, either through a Help to Buy or Lifetime ISA. If you are planning on taking advantage of a Help to Buy Equity Loan, make sure you do the maths on how you’ll afford to repay the interest on the loan, and ensure you’re saving during those first five years.
Whatever type of home you choose, make sure to take advantage of all the information available to first time buyers – compare rates on mortgages, check reviews when it comes to solicitors and always get a survey on the property you want to buy. Just because it’s your first time buying doesn’t mean you should cut corners – it’ll pay off in the long run!