New first-time buyer scheme where you only need a 1% deposit launched – everything you need to know
FIRST-TIME buyers could get on the property ladder with just a 1% deposit with a new scheme.
Property developer Fairview has launched Save to Buy to help those who otherwise could not afford to buy.
The scheme allows first-time buyers to save for their final deposit via fixed monthly payments while living in their new home.
You only need a 1% deposit to get started, then once you’ve saved the required amount, you can apply for a mortgage to buy your home.
Be aware that the offer is only available on limited plots in and around London at the moment.
It will run until December 2023.
First-time buyers are struggling to get on the property ladder as it can is difficult to save for a deposit due to rising living costs and rent increases.
It comes as the government’s Help to Buy scheme is set to end on March 31 – the date when all legal completions need to be finalised by buyers.
Currently, under the Fairview scheme properties are available at Epping Gate in Essex and NewHayes in West London.
All the new-build properties in the scheme range from £325,000 to £500,000 and the buyer only needs to show that they have 1% of the deposit saved currently to qualify.
Respectively, 1% of these property prices is £3,250 and £5,000.
Those using the scheme will have up to two years to complete on their Save to Buy property.
Although, Fairview expects most to complete their home purchase within six to 12 months.
An adviser from Torc24, the advice firm, will approve a buyer based on their suitability and recommend a monthly repayment schedule.
This is then approved with Fairview once the buyer is happy.
If a buyer is unable to complete, or has challenges with the payments, Fairview says it would review this on a case-by-case basis.
The buyer would then be advised to speak to their sales representative about their individual circumstances.
If the buyer decides to pull out of the agreement, they can get their 1% deposit back.
But, the monthly deposit payments they’ve already made to date would not be returned.
Monthly payments are based on the area’s average monthly rent and a buyer’s personal finances, of which 100% goes towards the deposit and/or affordability deficit on the home.
As an example, if someone is £9,000 short of a deposit they could pay £1,500 a month for six months and then progress with the mortgage application process.
When you are within one month of reaching the required
deposit amount, you can submit a mortgage application
to buy the property.
Fairview said that there is no specific deposit requirement as it’s decided between the buyer and the mortgage lender.
The final deposit amount depends on the property price and the loan-to-value (LTV) mortgage they secure.
For example, if their property costs £350,000 and they secure a 90% LTV mortgage, they will need a £35,000 deposit (10%) once they come to apply for the mortgage.
But, the amount they need to save through their monthly payments will depend on their property value and mortgage value.
Torc24 will help buyers to calculate their affordability when they apply.
So, do bear in mind that just because you can exchange contracts with just 1% – you will be paying more than that once you’ve made the monthly payments.
It’s worth noting, if you have a 1% deposit you may end up with a more expensive mortgage, so it’s worth checking out your options.
Once completed, buyers will own 100% of the property themselves.
There is no requirement to use a specific lender for the mortgage.
You can use any mortgage provider or financial adviser when it comes to completion.
This is to open up access to more competitive mortgage rates, Fairview said.
The scheme is only available on a first-come-first-serve basis, but if you’re not ready yet you can get added to a waiting list.
To be eligible you must be over 18, in full-time employment and have the minimum 1% saving.
The property must be your only home and you will need to be qualified by a third-party financial advisor to confirm your affordability and credit score.
What other schemes are available?
Here are a few other first-time buyer schemes you can take advantage of.
‘Mortgage-free’ offer
First-time buyers who reserve a new Persimmon home by January 31 can benefit from the company covering up to 10 of their monthly mortgage payments.
The mortgage-free incentive is capped at 5% of the agreed sale price.
For example, if your new home costs £245,000, Persimmon will pay up to £1,225 in your mortgage payments for 10 consecutive months.
This equates to an annual saving of £12,250.
The 5% discount is the maximum that a developer is allowed to contribute to a customer securing a mortgage – so if your house costs more than the average, it may not cover your whole monthly bill.
But be aware that the offer is available on selected developments and plots only.
The scheme is not open to those who purchase a property with a buy-to-let mortgage or those whose property was purchased using the First Homes Scheme or through a Discount Market Sale.
Mortgage guarantee scheme
The mortgage guarantee scheme helps households with 5% deposits purchase their homes.
It enables buyers to take out a mortgage worth 95% loan to value (LTV), meaning only a 5% deposit is needed.
Under the scheme, the Government guarantees part of borrowers’ home loans, reducing the risk on the loans.
It means that if the borrower is unable to pay one month, the state will pick up the bill – although it is highly likely there will still be repercussions for borrowers if this happens.
The scheme slashes the minimum amount first-time buyers need to purchase their first homes in half.
For example, a 10% deposit for a £300,00 home is £30,000 but under the programme, buyers would need just £15,000 for a deposit worth 5%.
The scheme runs for properties worth up to £600,000, which would see the minimum deposit required lowered from £60,000 to £30,000.
But while the scheme will help those struggling to scrape a deposit together, buyers will still need to earn a certain amount to be able to borrow a big enough mortgage.
Lenders will typically lend borrowers up to four or five times their salary.
So to buy a £600,000 house with a 5% deposit, you’d need to have a combined income of a minimum of £135,000 a year.
A major downside of these loans, however, is that the interest rates are often considerably higher than you’d pay with a higher LTV mortgage.
Shared ownership
Shared ownership lets first-time buyers purchase a portion of the equity in a property if they can’t afford to take out a mortgage for the total value of the home.
You’ll co-own your home with a housing association, which will charge you rent on its portion of the property.
Buyers will find they’ll likely need to buy a new-build home.
Buyers must purchase between 10% and 75% of the property to use the initiative, and they can then “staircase” – buy more shares in instalments – until they own 100% of it.
You can put down a deposit of just 5% using a shared ownership scheme.
While it can make buying a home more affordable, there are a few disadvantages.
You don’t have as much freedom when it comes to selling up – if you own less than 100%, your housing association will get a set period of time to find a buyer.
That means you won’t be able to accept a higher offer from someone else.
Or, you might have to sell it back to the housing association instead of putting it on the market.
There are also fewer lenders offering shared ownership mortgages compared with standard ones.
This means there isn’t much competition to offer decent rates.
Help to Build
The government last year unveiled its Help to Build scheme to first-time buyers.
It means you’re able to build your own home with just a 5% deposit.
The government can give you an equity loan based on the estimated costs to buy the plot of land and build your home.
The loan amount can be between 5% to 20%, and up to 40% in London.
It will make building your own home more affordable, as previously, you needed a deposit worth around 25% of land and building costs.
With a home costing £400,000 to build, you would need to raise £100,000 typically. At 5% this would be just £20,000.
But there are some downsides.
Building costs can often run away – which means you could go over budget and end up forking out much more than you want to.
It could also be challenging to find land to buy and build on – including the faff of getting planning and a mortgage.
Companies offering loans with 5% deposits
There are companies offering loans to first-time buyers with just 5% deposits to help them boost their home budget
If you have saved up enough for a 5% deposit, you can apply for a home loan from Proportunity.
It works in a similar way to Help to Buy – but the key differences are that you can get a loan to cover up to 25% of the total value of a property, and it doesn’t have to be a new build.
You can repay your loan at any point – for example, you could choose to pay it back at all once when you sell up.
Ahauz is another company offering equity loans to buyers with a 5% deposit.
Again, you can get up to 25% of the property value up to £150,000.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk