Published 12 Jul 2016
Choosing Affordable Housing Products
With first time home buyers faced with so many options for getting onto the property ladder, it can all get a bit confusing sometimes.
The new Mayor of London’s focus on building more affordable homes and the introduction of new Government-backed affordable housing products have all increased the options for first time buyers. But what are the differences between them?
Shared Ownership is a part buy/part rent scheme, where you buy a share of a property and pay rent on the share you don’t own. You can read all about it in our complete guide to Shared Ownership.
Changes to the scheme
In April 2016, changes were made to eligibility criteria to make the scheme accessible to more people. One change was that purchasers’ maximum annual household income was increased to £90,000 (in London) for all property sizes – previously it was restricted by number of bedrooms. There is also no longer a restriction on the property size an individual can purchase, provided they can afford it - previously you could only purchase a property with one more bedroom that your household required.
Another change means it is harder for local boroughs to restrict the allocation of properties to those living or working in the borough in which the property is located. It may take a little while for these changes to take effect, as developments being built in the next few years will already have planning permission approved that specifies local borough priority. But ultimately only military personnel will be given priority over other applicants.
Each housing association will however still have their own allocation policy when more than one person is interested in purchasing the same property. Therefore, it’s best to speak to the housing association you’re purchasing from if you have any queries about allocation of properties.
It’s important to note that Shared Ownership (as with every affordable product listed here) is only open to those who do not own another home, or are in the process of selling their home. You can read the full eligibility criteria here.
You are also unable to rent out a spare room or the whole property. You can read more about that in our FAQ section.
What are the benefits?
One of the key benefits of Shared Ownership is that you require a smaller mortgage deposit than for other affordable products or buying on the open market.
When purchasing a property worth £400k:
- If buying a 30% share, you pay a £12,000 deposit¹
- You get a mortgage for the remaining £108,000 of the share¹
- You pay rent on the 70% unsold equity starting at £700 per month²
¹Based on a 90% loan-to-value repayment mortgage. ²Based on an initial rent amount of 3%, which is the maximum. This initial rent amount varies between providers. This figure will increase by inflation plus 1% annually.
Help to Buy products
The Help to Buy scheme has been set up by the Government with the specific aim of getting first time buyers on the property ladder. There are several products that fall under the scheme, namely:
- Help to Buy Equity Loan
- London Help to Buy
- Help to Buy Mortgage Guarantee
- Help to Buy ISA
All these products are available to first time buyers and current homeowners looking to move. The home being purchased must be a new build and must be valued at no more than £600,000.
Equity Loan / London Help to Buy
The equity loan and London Help to Buy products are essentially the same –the London Help to Buy product just offers a larger loan percentage to account for higher property prices in the capital.
With this product you can get a loan from the Government of up to 40% of the property price (20% outside of London). To secure a mortgage for the remaining share you then only need a 5% cash deposit.
So, for example, on a property worth £400,000:
- You can apply for a loan from the government of £160,000
- You will need a cash deposit of £20,000
- And you get a mortgage for the remaining £220,000
Or outside of London:
- You can apply for a loan from the government of £80,000
- You will need a cash deposit of £20,000
- And you get a mortgage for the remaining £300,000
Anything else I need to know?
You won’t be charged any fees on the equity loan for the first five years. After that time you’ll be charged interest, starting at 1.75% of the amount of your equity loan. This will increase annually at a rate of RPI plus 1%.
The loan must be repaid after 25 years or when you sell the property, whichever occurs first. Bear in mind that when you repay the equity loan, the loan value is based on the value of the property, not on how much you borrowed. So, if the property value has increased by 5%, the value of the loan also increases by 5% when you repay it.
For more information on the scheme and the fees involved see here.
With this product, the Government offers lenders the option to purchase a guarantee on mortgage loans. This means that you’ll be more likely to be able to acquire a high loan-to value mortgage – somewhere between 80% and 95%.
Other than that there’s no difference when compared to buying on the open market.
This scheme will no longer be available to new customers after 31 December 2016.
For more information visit this page.
Help to Buy ISA
Through the Help to Buy scheme the Government is also offering those saving for their first home a chance to see their savings boosted by up to 25% through a Help to Buy ISA.
For every £200 you save, the Government will contribute a bonus of £50. The maximum bonus you can receive from the Government is £3,000.
Find out more here.
The Starter Homes scheme is the latest affordable housing initiative proposed by the Government. The scheme will aim to provide 200,000 new homes to first time buyers across England by 2020.
The scheme will be exclusively for first time buyers under the age of 40, and will allow them to receive a discount of up to 20% off the full market value of a property from the house builder.
This discount will be made possible through the reduction and removal of some typical fees housebuilders have to pay to the Government and local council. They are then able to pass that saving on to first time buyers.
The properties you can buy through this scheme will be pre-determined, as they must meet certain criteria, including being built on previously under-used commercial or industrial land.
How much does it cost?
The price of a new property is capped at £450,000 (or £250,000 outside of London) after the discount. So the full market value must be £562,500 or less in London and no more than £312,500 outside of London.
You will need to get a mortgage to pay for the property, but this mortgage will be based on the discounted property value. So, if you were to get a 90% loan-to-value mortgage on a property discounted to £450,000, you would need a deposit of £45,000.
Anything else I need to know?
You are not able to let out the home you buy through this initiative, and if you want to sell it within five years of buying, you’ll have to pass on the 20% discount to the person who buys it from you.
How do I apply?
The scheme has not yet been implemented, but planning is underway. If you wish to register your interest to receive more information when it becomes available, you can do so here.
If you would like more information about Shared Ownership or other affordable housing products, you can speak to a member of our dedicated team by contacting us.