New 2.5% mortgage scheme for people who 'don't have bank of mum and dad' explained

The UK Government has launched a brand-new housing scheme for first time buyers that aims to help those who don’t have parental financial support.

Tired of seeing your mates get a house because mum and dad paid the deposit? Not anymore.

Ever since the 5% Help to Buy for first time buyers was scrapped a few years back, people who have dreamed about owning a house that wouldn’t take years to save up for the 10 per cent deposit, have been sorely out of luck.

Until now.

A Saturday 26 September announcement made by the government has revealed a new equity loan scheme, titled: Your First Home.

While the details will be ‘confirmed at next month’s Budget’, it ultimately has been created to ‘support more people into homeownership.’

How does it work?

According to the press release, the scheme will enable people who have not bought a house before, pay a 2.5% on a new-build property from a developer who has signed up to the scheme.

Backed by 20% government-backed equity loans, it means that those who want to purchase this type of property will be able to take advantage of an initial interest free period on the loan to save them a potential 'hundreds of pounds per month compared to a 95% mortgage.;

The release said: “The Your First Home scheme will help tackle the deposit barrier for first-time buyers who would be unable to afford their first home otherwise, building on the government’s existing work to help more young people and families onto the housing ladder. The scheme will also set a household income cap with local property price caps to further ensure support is targeted at those who need it, the detail of which will be set out at Budget.”

While it sounds like a great option for someone looking to get their foot on the property ladder, the way repayments would look totally depends on the location in question.

What could your mortgage repayments look like?

According to one X user who responded to the UK Prime Minister, Andy Burnham’s X post on the matter, it could end up costing a homeowner over a grand to repay the mortgage each calendar month.

That’s because the average house price in the UK currently sits at £272,000 per Zoopla.

So, to pay a 2.5% deposit, a person would need to save £6,800 (not including solicitor fees). From there, the unpaid mortgage would sit at £265K, and with an interest rate of say 5.5 per cent over 25 years, it would leave the monthly repayment as being £1,627.

However, when you take into account the 20 per cent equity loan (thanks to the gov), you'll be paying 20 per cent less on the repayments: £1294 per month, which means there's a few hundreds left for you to enjoy in the bank.

Without the ‘bank of mum and dad’, it could help some people to afford a home.

What happens when you come to sell?

Okay, so here's where it gets complex.

Essentially, it works out in a different way due to the fact that it is bought using a government equity loan.

This means that you have taken a loan out with the gov, and will need to repay that 20 per cent at some point.

According to the Home Owner’s Alliance, 'unless you have repaid your loan in full through staircasing (the process whereby homeowners repay a loan in part via multiple payments), you will repay the Help to Buy equity loan simultaneously when you sell.’

So, you ‘can’t sell your home unless you pay off the equity loan’.

The website states that ‘if you took out an equity loan of 20% of the value of your property and have made no other staircasing repayments, you will need to repay 20% of the market value of your property or the sale price, whichever is higher.’

For example, if you bought a £200,000 home with a 20% equity loan of £40,000, you would repay that £40,000 if the house remains valued at the same price.

But if it increases, so will your repayment.

What do the experts say?

When it comes to the pros and cons about the scheme, Tim Grimsditch, Managing Director of Unbiased, a financial advice platform, said there’s plenty that’s good about it.

He told LADbible: “Your First Home, announced on 26 September, could make a significant difference to first-time buyers by reducing the deposit needed to buy a home in England to 2.5%, particularly for those who can afford monthly mortgage repayments but have struggled to save a large enough deposit.”

He went on to call a housing deposit 'one of the biggest hurdles for prospective homeowners’ as 'on a £300,000 property, a 5% deposit means finding £15,000 before you even consider legal fees, moving costs and other expenses.’

However, via the proposed new 2.5% scheme, ‘that initial deposit would fall to £7,500.’

Grimsditch said: “That could potentially bring homeownership forward by several years for some buyers. Another potential advantage is the 20% government-backed equity loan and its initial interest-free period. This could reduce the size of mortgage a buyer needs compared with purchasing the same property using a high loan-to-value mortgage, potentially making monthly repayments more manageable.”

But he was quick to point out that this doesn’t automatically make buying a home affordable.

That’s because ‘mortgage lenders will still assess whether someone can afford their borrowing based on their income, expenditure and financial circumstances’.

He explained: “Someone may be able to find the 2.5% deposit but still not be able to borrow enough to purchase the property they want.”

The expert explained: “There is also an important difference between an equity loan and a conventional mortgage. The government will effectively have an equity stake in the property, so buyers need to understand exactly how that loan will eventually be repaid and what happens if the value of their home rises or falls.”

He urged that ‘anyone considering Your First Home should make sure they understand the long-term costs as well as the immediate benefit of a much smaller deposit’ and to know that there are limitations on what home you can buy.

He said: “Overall, the most attractive part of Your First Home is that it tackles one of the immediate problems facing first-time buyers: getting the deposit together.

But the deposit is only one part of buying a home. First-time buyers should look at the total mortgage they will need, monthly repayments, the terms of the equity loan, additional buying costs and whether they could still afford their home if their circumstances or mortgage rates changed.”

Pros

“The biggest potential advantage of Your First Home is the dramatically lower upfront deposit. It could help first-time buyers in England who have sufficient income to support a mortgage but have been unable to save tens of thousands of pounds while also paying rent and other living costs,” said Grimsditch.

He added: “The government-backed equity loan and initial interest-free period could also reduce the amount buyers need to borrow through a conventional mortgage.”

Cons

The expert went on to say: “A 2.5% deposit doesn’t remove mortgage affordability tests, and buyers will still need to demonstrate that they can afford their borrowing.

The scheme is restricted to participating new-build developments in England, limiting the properties available.”

Grimsditch said: “Buyers will also need to understand the implications of the government holding an equity stake in their home and how much they could eventually have to repay.

Analysis of Help to Buy found first-time buyers using the scheme paid more than 10% more for new-build properties than those buying new homes without it. Schemes that increase buyers’ purchasing power without sufficient additional housing supply can put upward pressure on prices, so the long-term impact of Your First Home will depend heavily on how the scheme is designed and how many new homes are delivered.”