Low Cost Ownership Options

Low Cost Ownership Options

June 8, 2016

Getting your foot on the property ladder has become tougher than ever, with rising house prices not being matched by a corresponding rise in average wages. Many people are finding the prospect of house ownership completely daunting, so to help open up the market to buyers there are several initiatives that make owning your first home a more achievable prospect, coming under the UK Government’s “Help to Buy” schemes. Working out which one is best for you is tough, so our concise guide to low-cost home ownership is here to help you find the best way to get the property that you want!

Choosing a low-cost ownership option:

The schemes provided here are all designed to help buyers stretch their budget farther; by reducing the costs associated with larger mortgages, buyers are encouraged to borrow more money, as bigger mortgages become more affordable. These incentives are very helpful to those who can’t afford to make a deposit on the house they want, but it’s very important to bear in mind that with each scheme you will need to pay the money back, and you should never borrow more than you can comfortably afford. Don’t forget to take into account expenses like Stamp Duty, which increases from 1% to 3% on houses over £250,000, and the higher overall costs associated with purchasing and owning a larger house.

To get an idea of how much money you comfortably afford to borrow, read our guide to understanding “How Much to Borrow”. This breaks down the costs associated with borrowing and ways to ensure that you’ll be able to meet future repayments!

Equity Loans

“Taking out a cheap loan from the government is a great way to boost the size of your deposit and secure a cheaper mortgage. Repaying it at the same time as repaying your mortgage can be difficult, though, and interest rates will apply after the first 5 years!“

How does it work?

To qualify for this scheme, you’ll need to be buying a newly-built property under £600,000 and have at least a 5% deposit. The scheme is open to home movers as well as first-time buyers.

This scheme allows you to reduce the size of your mortgage by borrowing from the government instead. As long as you have at least a 5% deposit you’re able to borrow an additional 20% from the government, thereby reducing the size of your mortgage from 95% to 75%, and ideally lowering your interest rates substantially! If you have more than a 5% deposit you can still borrow 20% of the house value and thereby drive your interest rates even lower.

For example, if you decide to buy a £300,000 house you would need to provide a 5% deposit of £15,000. The government would then contribute an additional £60,000, and you’d have to take out a mortgage for the remaining £225,000. Though you’re still borrowing a lot of money the interest rates you’re offered should be lower as a result of the reduced size of the mortgage. Whether the drop in mortgage rates is enough to offset the cost of the loan is up to you to calculate!

What are the benefits?

                The size of your deposit is one of the most important factors that lenders consider when offering interest rates; the more you can afford to invest yourself, the more reliable an investment you are for them. By boosting your deposit by 20% you’ll be able to apply for a cheaper mortgage and save yourself from paying the higher rates typical of a high-LTV mortgage! The loan is also interest-free for 5 years, so you won’t need to pay back any extra until you’ve had a chance to save.

What are the costs?

An equity loan is a stake in your home, which means that you’ll need to repay the equivalent value of the percentage of your property; if the value of your property increases then the amount you’ll have to repay will, too! For example, if you take out a 20% loan to buy a £300,000 house you’ll be borrowing £60,000. If your property is then worth £350,000 when you repay the loan, you’ll have to repay 20% of the current value – equivalent to £70,000.

You’ll have to repay the loan in full when you sell your house, and if your property has increased in value this can be a big chunk of money to pay back! You can repay the loan at any point, but you’ll have to repay an amount that is at least equal to 10% of the value of your property on the current market – since you’re borrowing 20% of the value, this means you can only pay back the loan if you can afford to pay at least half of it in one go.

Another point to consider is that although the government loan is interest-free for 5 years, it will accrue interest equal to the Consumer Price Index (CPI) rate plus 1%, so you’ll be liable for interest repayments on the equity loan as well as your mortgage!

Mortgage Guarantees

“The government is offering to guarantee a portion of high-value mortgages to incentivise lenders to offer them more readily, and at better rates. The rates on offer can still be high, though!”

How does it work?

The UK government is offering mortgage providers the option to purchase a guarantee of a portion of your mortgage if you only have a 5% deposit. This scheme is open to first and second time buyers, and isn’t restricted to new-build homes like most help to buy schemes, so long as the property being bought is under £600,000 in value.

What are the benefits?

By offering to cover up to 15% of the total mortgage in case of defaults, the government is effectively reducing the risk that mortgage providers take when approving high loan-to-value mortgages. This means that you should find it easier to be approved for a mortgage like this, and your interest rates should be lower than they otherwise would be.

Because the guarantee is negotiated between the lender and the government you’re unlikely to know if your provider is taking part in this scheme, so you won’t need to fill in any additional paperwork.

What are the costs?

Although the mortgage will be covered for 15% of the total value, there is still a good deal of risk associated with a 95% LTV mortgage. This means that although your interest rates are likely to be lower than they otherwise would be, they’ll still be higher than for a mortgage with a larger deposit!

Shared Ownership schemes

“Splitting the costs of owning your home with a housing association can be a great way to get a cheaper mortgage, but leaves you paying rent as well as mortgage repayments!”

How does it work?

Purchasing a shared ownership property requires you to pay for at least 25% of the property and rent the rest from the housing association. Although you share ownership of the property with the association you won’t share living space with anyone else.

It is possible to increase your shares in the property at any point, which is known as “staircasing” – you’ll pay a percentage of the property value for a correspondingly higher share of the property ownership (and therefore a lower rental cost), and you’ll usually need to buy at least 10% of the property each time.

What are the benefits?

Because you’re only having to raise money for part of the property’s value you’ll be able to take out a smaller mortgage, thereby increasing the relative value of your deposit. This allows you to secure a better rate of interest on your mortgage, or to make purchasing a more expensive property more affordable.

For example, if you have a £15,000 deposit and wish to buy a £300,000 property your deposit will only be worth 5% of the property value, meaning you’d need to take out a 95% mortgage with a typically higher rate of interest. If you enter into shared ownership on the property and decide to buy 50% of the property you’ll only need £150,000, and your £15,000 deposit is now worth 10% of the mortgage. Since a larger deposit almost guarantees you a better rate of interest this will lower your monthly repayments!

What are the costs?

                Although you may have lower monthly mortgage payments to make, you’ll still need to pay rent for the portion of the property that you don’t own. This is limited to up to 3% annually of the value of the property that they own, so if you owned 50% of a £300,000 house you’d need to pay £4,500 per year in rent on top of your mortgage payments.

What to watch out for:

Shared ownership creates a grey area; you’re not a private tenant, so you don’t have a landlord who’s responsible for fixing and maintaining your property. However, you’re also not a full owner, and if you should fall into arrears on your rent your housing association may be able to evict you, in which case you are unlikely to receive any compensation for money you’re invested in the property.

Shared ownership properties are also exclusively leasehold, meaning that you’re essentially a long-term renter – the property’s freeholder owns the actual rights to the property, and you’ll need to renew the leasehold periodically to remain in possession.

Rent to Buy:

“Though it’s becoming increasingly rare, rent to buy schemes are an excellent way for new buyers to save for their first property, and offers an opportunity to buy their own home!”

How does it work?

Under this scheme, properties are offered for rent at a reduced rate of 80% of their market value, to allow tenants to save up the money for a deposit at the end of the tenancy. There is no obligation to purchase the property at the end of the tenancy (nor even an obligation to save at all), but as these properties are very limited in number they can be difficult to successfully apply for, and agencies will likely only accept applications from tenants they believe will attempt to purchase the property. Under the terms of the scheme each property is also available to purchase under a part-ownership scheme.

What are the benefits?

The most important contributing factor to a property purchase is the size of your deposit – the more you can afford, the better mortgage rates you’ll be offered and the better a house you can buy. Rent-to-buy schemes afford first time buyers a great opportunity to cut their expenses and build up a bigger deposit, which they can then use to secure a better mortgage deal at the end of their tenancy.

For example, a couple could rent a flat that would normally cost £800pcm at a discounted rate of £640pcm, saving them almost £2,000 over the course of a year. As rent-to-buy tenancies can run for up to 5 years, this means that they’d be able to put an extra £10,000 into their deposit for their first house! Combining this with a part-ownership scheme could mean that during the course of their tenancy they’d save enough to purchase their home without any additional savings.

What are the costs?

The limited availability of properties on the rent to buy program can limit your choices, and cause you to live in a less than ideal house. If your new home causes you to spend more on transport or energy than you’d otherwise have to