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First-time buyer scheme extended by a year to help households with 5% deposits purchase their homes

FIRST-TIME buyers with small deposits will get more support to get on the property ladder thanks to a scheme extension.

The mortgage guarantee scheme helps households with 5% deposits purchase their homes.

First-time buyers will get extended support as the government lengthens the Mortgage Guarantee Scheme

It was originally announced as part of the 2021 Budget, supposed to end this month.

Under the programme, house buyers will need just a £10,000 deposit to be able to afford a £200,000 home.

It enables buyers to take out a mortgage worth 95% loan to value (LTV), meaning only a 5% deposit is needed.

So far, the scheme has helped over 24,000 households.

And instead of ending this year, the government has announced it will extend the scheme until December 2023.

Chief secretary to the Treasury, John Glen MP said: “For hard-working families facing today’s challenging economic conditions, it’s right that we continue to help them secure their first home or move into their dream house.

“Extending this scheme means thousands more have the chance to benefit, and supports the market as we navigate through these difficult times.”

It comes after September’s mini-budget sent mortgage rates soaring and lenders withdrew plenty of loans.

House prices then dropped by 0.9% in October, according to Nationwide.

The annual rate of house price growth also slowed to 7.2% in October down from 9.5% in September.

Sam Richardson, deputy editor of Which? Money, said: “Rising rents and the cost of living crisis are making it harder than ever for anyone trying to save money to buy their first home, so it’s understandable that 95 per cent mortgages could be appealing to those looking to get on the property ladder.

“However, there are plenty of reasons to put down a bigger deposit if you can afford it, including cheaper monthly repayments, lower interest rates and less risk of falling into negative equity.”

How does the scheme work?

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%.

On a £400,000 house, buyers would need to fork out £20,000 compared to £40,000, or £25,000 instead of £50,000 on a £300,000 home.

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. 

If house prices continue to drop – which is expected next year – this increases the risk of ending up in negative equity.

It means your house is worth less than the mortgage you owe, making it difficult to remortgage at a favourable rate.

You’ll also still be in debt, even if you sell the property.

What other schemes are available?

The mortgage guarantee scheme isn’t the only programme available to first-time buyers.

Here are a few others you can take advantage of today.

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.

But a word of warning – alternative finance firms can often charge significant interest rates offering loans like these.

Plus, some lenders might not lend you a mortgage using an equity loan like this – so you might not get the best deal.

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