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 and a half per month to repay the mortgage.

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.

Without the ‘bank of mum and dad’, it could still be too costly for people to afford.

What happens when you come to sell?

Then there’s the case of what could happen when it comes to selling the property.

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 it.

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.