Tips for getting onto the property ladder in 2021 - from a finance expert

by Derin Clark

The impact of the pandemic on jobs and wages, combined with lenders withdrawing mortgage deals aimed at first-time buyers and house prices continuing to rise, has made this a very difficult year for many people looking to buy their first home.

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Although the first-time buyer market remains challenging there are signs that there may be more mortgage deals available to those looking to buy their first home next year as well-known mortgage lenders are starting to re-enter the market.

In fact, data collected by Moneyfacts.co.uk has found that on the 10 December 2020 first-time buyers had the choice of 130 mortgage deals available to those with a deposit of 10% or less.

Although this may seem like a lot, if you are planning on buying your first home you should be aware that some of these deals are only available as a guarantor mortgage, while others are restricted to those living within specific areas.

To help you avoid wasting time on applying for mortgages that have restrictions or which are not suitable to your individual needs you may want to consider using a mortgage broker.

A mortgage broker will not only be able to highlight the best deals available to you, but will also be able to guide you through the mortgage application process, from ensuring you have all the documents needed for the application to making the application for you. In addition to this, a broker will be able to help if any problems arise with the mortgage application. But it is important to remember that mortgage brokers may charge a fee, so you should factor this into your costs if you choose to use a broker.

Should you consider a guarantor mortgage?

As already mentioned, some deals available for first-time buyers with a 10% deposit or less are guarantor mortgages.

A guarantor mortgage is a type of mortgage that requires a third party, for example the borrower’s parents or grandparents, to put up an asset against the mortgage (this could be their home or savings) as a guarantee and to make the repayments themselves if the borrower fails to do so. This means that if the borrower is unable to keep up with their mortgage repayments the guarantor risks losing the asset they put against the mortgage, along with the borrower losing their home.

Although these mortgages carry a greater risk than standard mortgages, as both the borrower could lose their home and guarantor could lose their asset, these mortgages can be a good way for first-time buyers with deposits of 5% or less to get onto the property ladder.

What help to buy schemes are available?

If you are a first-time buyer struggling to get a mortgage but do not want to use a guarantor mortgage, you can consider a Help to Buy Loan instead. In November 2020 the Government announced it is replacing the existing Help to Buy scheme with its new Help to Buy Equity Loan (2021-2023) on the 1 April 2021. Although the new scheme does not replace the existing scheme until April, first-time buyers can reserve their new home using the scheme from the 16 December 2020, but cannot get the keys and move in until April next year.

The new Help to Buy Equity Loan (2021-2023) is only available to first-time buyers who are buying a new-build home. Under the scheme, first-time buyers can borrow up to 20% (40% in London) of the cost of a newly built home. Buyers must pay a minimum 5% deposit for the home and then use a help to buy mortgage for the remainder of the cost of the home.

An example of how this works is that if you purchased a new home costing £200,000, you would need a 5% deposit of £10,000, you would borrow 20% via the Help to Buy scheme, which would be £40,000, you would then get a Help to Buy mortgage on the remaining 75% of the property, resulting in a mortgage of £150,000. But you should be aware that, along with making mortgage repayments, you will have to repay the loan, which is interest-free for the first five years and then interest starts at 1.75%, rising each April by the Consumer Price Index plus 2%. In addition to this, you will also be charged a monthly management fee of £1 for the term of the loan.

If you are considering a Help to Buy Equity Loan, it is also important to be aware that the Government introduced regional price caps on the prices paid for the new home. For example, this means that those in the north east can use this scheme on properties up to £186,100, those in the north west on properties up to £224,400, and Yorkshire and The Humber on properties up to £228,100.

This Help to Buy scheme is only available to those in England, but first-time buyers in Scotland can consider the Help to Buy (Scotland) Affordable New Build scheme. This scheme is available to both first-time buyers and existing homeowners and helps with up to 15% of the purchase price of a new build home.

This scheme requires the buyer to pay a minimum of 85% of the home’s total purchase price and the Scottish Government holds the remaining percentage share under a shared equity agreement. It can be used to purchase properties of up to £200,000 for the 2020-21 financial year.

Another scheme available to those in England is the shared ownership scheme, which enables you to purchase a minimum of 25% up to a maximum of 100% of a property from a housing association. Under this scheme you will pay rent on the percentage (if any) that is still owned by the housing association.

In Scotland there is a similar scheme called co-ownership, which is also available to those in Wales and Northern Ireland.

For more information about mortgages available to first-time buyers and to see what rates are available, including guarantor and help to buy mortgages, take a look at the first-time buyer mortgage charts at Moneyfacts.co.uk