Govt’s new FTB scheme for borrowers with just 2.5% deposit – Mortgage Strategy

The government is set to launch a new first-time buyer scheme in next month’s Budget that will help borrowers get onto the ladder with a deposit of just 2.5%.

The Your First Home initiative will provide 20% government-backed equity loans, similar to Help to Buy, to enable borrowers to buy a new-build property from a developer who is signed up to the scheme.

Borrowers will take out a mortgage of up to 95% loan-to-value, however the minimum deposit required is even smaller under the new plan at 2.5% compared to 5% under Help to Buy.

The government’s preliminary announcement does not reveal exactly how the remaining 2.5% of the property’s purchase price will be funded, but housebuilders will make a financial contribution when taking part in the scheme and full details will be revealed in the Budget.

John Charcol mortgage technical manager Nicholas Mendes breaks down the numbers:

“On a £230,000 property, the Rightmove average for first-time buyers, the deposit would be £5,750 alongside a £46,000 equity loan and a £178,250 mortgage,” he says.

“Compared with a standard 5% deposit of £11,500 on the same property, the scheme roughly halves what a buyer needs to save.

“Because the equity loan covers 20%, the mortgage itself sits at 77.5% loan-to-value, which gives buyers access to lower rates than they would typically see on a 95% mortgage.”

Mendes welcomes the scheme, but reminds borrowers that there are other options for buying homes that are not brand new, such as Accord’s £5K deposit mortgage.

Buyers will need to weigh up some of the risks of buying new-build, such as the premiums attached to brand new properties, which mean they can depreciate in the years immediately after purchase, with the disadvantages of schemes that require a larger mortgage and therefore higher borrowing costs.

He adds: “The right route will depend on the buyer’s circumstances and the type of property they want, which is where speaking to a broker can make a real difference.”

Association of Mortgage Intermediaries chief executive Stephanie Charman says: “The deposit remains a significant barrier for many aspiring homeowners, particularly those without access to family support, and it is positive to see that the scheme will include income and property price caps to target help where it is most needed.

“The success of the scheme will depend on getting the detail right.

“A 2.5% deposit represents a change from the 5% minimum under the previous Help to Buy scheme and lenders will need to consider product design, systems and how these applications work in practice.

“Mortgage advisers will have an important role in helping consumers understand whether the scheme is right for them and, crucially, whether the borrowing remains affordable over the longer term.

“We also need to understand how the property price caps will interact with existing first-time buyer Stamp Duty thresholds and whether sufficient suitable new-build homes will be available in the areas where buyers need them.

“Your First Home should be a stepping stone into sustainable homeownership, not a sticking plaster for the wider challenges facing first-time buyers.”