A FIRST-TIME buyer scheme where you need just a tiny deposit of £2,900 is being considered by the government.
A new 1% deposit scheme could be announced by the Chancellor in the Spring Budget on March 6.
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The scheme would allow first-time buyers to guarantee a mortgage with just a tiny deposit, according to The Independent.
With the average UK house price standing at £290,000, this could mean wannabe buyers getting on the ladder with a deposit of just £2,900.
Most lenders usually require at least a 10% deposit, which would be £29,000 based on the average UK house price.
Government sources said a Treasury-backed scheme to help generate rent, according to reports.
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The government already runs a mortgage guarantee scheme for first-time buyers with a 5% deposit.
Through the scheme, buyers can get a 95% loan-to-value (LTV) mortgage.
The scheme was extended in the Autumn Statement for a further two years until 2025.
It’s not yet clear if the new scheme would replace this, but details are expected to be announced in the Spring Budget.
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A Treasury spokesman said: “The existing scheme providing a 95% loan to value mortgage was introduced in April 2021, and has so far enabled over 39,000 households to buy a home – over 86% of which are first-time buyers.”
Karen Noye, a mortgage expert at Quilter said the scheme could be a “lifeline for those struggling to save for a deposit”.
She added: “First time buyers have had a rough ride over the past few years, house prices have risen considerably, inflation has rapidly eaten away at hard earned savings, and high interest rates have stretched affordability, so taking a first step onto the property ladder has been pushed out of reach for many.
“A 99% mortgage may provide a solution for some.”
But Karen told The Sun that there are also risks to consider when taking out such a big mortgage, such as negative equity.
This is when a house or flat is worth less than the mortgage you took on it.
She said: “Having such a high loan-to-value mortgage would expose buyers to the risks of negative equity.
“If house prices drop, then only having 1% equity in a property leaves the buyer with a minuscule amount of equity to play with.
“Given lenders such as Halifax have predicted a 2-4% fall in house prices this year, borrowers taking out such a mortgage could be in negative equity before the year’s end.”
Another thing to consider is the impact a small deposit will have on mortgage payments.
There is a risk that your bills could be much higher with a small deposit and some buyers may even struggle to pass affordability checks.
With a higher deposit, you will be regarded as lower risk by lenders and will benefit from cheaper mortgage rates.
These may be harder to access for those with smaller deposits.
Karen said: “Monthly mortgage payments would be considerably higher which could stretch affordability.
“Interest rates have started to fall to slightly more palatable levels recently, but they remain far higher than the ultra-low interest rates seen in years gone by.
“This means it may be very difficult to pass lenders’ stringent affordability checks, and if they do then first-time buyers would likely face huge monthly costs.”
If you’re looking to get on the property ladder, the best thing to do is to seek professional mortgage advice from a broker.
They will be able to make the best decisions based on your personal circumstances.
While some brokers are free, just bear in mind that others will charge a fee, so make sure you check this first.
Meanwhile, we’ve outlined first-time buyer schemes you may be eligible for now to help you onto the property ladder.
Shared Ownership
If you are unable to save a deposit needed to buy a home or can’t afford the mortgage payments, Shared Ownership could be worth a closer look.
The government-backed scheme allows people to buy a portion of a property and pay rent to a landlord on the rest.
Buying a share of a property means the deposit and mortgage payments are smaller than if you were buying the whole lot. However, you will need to be able to afford both the rent and the mortgage repayments.
You can buy more shares of the home as when you are able to – a process known as staircasing – until you own the property outright.
Or if you want to move you can resell your share of the property.
For some Shared Ownership homes, you may have to show you have a job or links with the area where you want to buy.
Deposit boosters
The end of Help to Buy has prompted a flurry of private companies to offer a similar style equity loan. Even, OnLadder, Proportunity and Ahuaz are some of the new firms that have cropped up.
As with Help to Buy, these firms will loan you around 20 per cent of the purchase price to be used as a deposit on a property. Usually, you will also be need to contribute a deposit of at least five per cent.
An equity loan means the company takes a percentage stake in the home and share any price gains when it comes to sell.
If the home’s value has fallen, the loan provider will also share the losses.
Not all mortgage lenders accept so-called deposit boosters, so your choice of loans may be limited.
And unlike Help to Buy some of these loans also charge interest or may increase the percentage stake over time, which needs to be taken into consideration.
Save to Buy
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.
The Sun spoke to first-time buyers Letting agent Stan Chamberlin and executive assistant Eleonora D’aietti who bought their first home in June last year using the scheme.
The First Homes Scheme
First-time buyers can bag a home with a discount of up to 50 per cent using this government scheme.
The home’s discount will stay with the property forever and you won’t be able to cash in on the saving when it comes to selling.
To access the scheme, you will need to have a deposit worth at least five per cent of the discounted purchase price and earn less than £80,000 a year or £90,000 in London.
Local councils may also add further rules such as a local connection or reserving the properties for key workers only.
First Homes is usually offered on a small number of properties within new developments, so you will need to look for local builders advertising the scheme and apply through them.
Mortgage Guarantee Scheme
Available for first-time buyers and those who’ve owned a property before who have a minimum 5% deposit.
It can be used to buy any type of home so long as you don’t pay more than £600,000 for it.
By providing a guarantee that the government will cover some of a lender’s losses if a borrower can’t afford to repay their mortgage and the home is repossessed – more lenders are prepared to lend up to 95%.
Guarantor and family deposit mortgages
Mortgage lenders are trying to boost home ownership by finding more ways to allow family members to support hopeful buyers.
Generation Home allows family members to boost deposits either as a loan or a gift.
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And more lenders are offering deals known as Joint Borrower Sole Proprietor. Under these mortgages, the income of another person can be used to boost affordability. The additional applicant is liable for the mortgage, but they do not own the home.
Getting family help requires a large degree of trust and it is a good idea to work out a plan of what would happen if the buyer struggles to repay the mortgage.
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