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First-Time Buyer Scheme: Shared Ownership vs Help to Buy Explained

 

First-Time Buyer Scheme: Shared Ownership vs Help to Buy Explained


Are you dreaming of owning your first home but feeling overwhelmed by the challenges of the property market? You're not alone. The first-time buyer scheme has become a lifeline for many aspiring homeowners, offering a path to affordable housing in an increasingly competitive market. As you navigate the world of property ownership, it's crucial to understand the options available to you through the first-time buyer government scheme.

When it comes to making your homeownership dreams a reality, two popular options stand out: Shared Ownership and Help to Buy. These housing schemes are designed to give first-time buyers a leg up on the property ladder. In this article, we'll break down how each scheme works, compare the deposits and costs involved, and help you figure out which option might be the best fit for your situation. You'll also learn about the support provided by the government under both schemes, giving you a clearer picture of how they can help you become a homeowner.

Understanding Shared Ownership

Shared Ownership is a government-backed scheme designed to help you get on the property ladder. It's an alternative homeownership option that allows you to purchase a share of a property, typically between 25% and 75%, while paying rent on the remaining portion.

How Shared Ownership Works

You buy a share of the property and pay rent to a housing association on the rest. The initial share you can buy is usually between 25% and 75%, but some homes now offer a 10% starting share. You'll need a mortgage or savings to cover your share, plus a deposit of 5% to 10% of the share you're buying.

For example, if you buy a 50% share of a £200,000 property, you'd need a mortgage or savings of £100,000, plus a deposit of £5,000 to £10,000. You'd then pay rent on the remaining 50% to the housing association, typically at a rate of 2.75% of their share annually.

Eligibility Criteria

To be eligible for Shared Ownership, you must:

1.       Have a household income of less than £80,000 per year (£90,000 in London)

2.       Be unable to afford a suitable home on the open market

3.       Be a first-time buyer, or:

  • Used to own a home but can't afford one now
  • Be forming a new household (e.g., after a relationship breakdown)
  • Be an existing shared owner looking to move

Pros and Cons

Pros:

  • Lower deposit requirements
  • Easier to get on the property ladder
  • Option to increase your share over time (staircasing)
  • Potential for equity growth
Cons:
  • You're still a tenant and can be evicted
  • Service charges and ground rent apply
  • Restrictions on home improvements
  • Limited mortgage lenders for Shared Ownership

Remember, Shared Ownership properties are usually leasehold, and you'll need to consider factors like lease length and service charges. While the scheme offers a more accessible route to homeownership, it's crucial to weigh the benefits against the potential drawbacks before deciding if it's right for you.

Exploring Help to Buy

The Help to Buy scheme is a government-backed initiative designed to assist first-time buyers in getting onto the property ladder. This scheme provides an equity loan to help you purchase a new-build home with a smaller deposit.

How Help to Buy Works

Under this scheme, you can buy a new-build home with just a 5% deposit. The government provides an equity loan of up to 20% of the property's value (40% in London), which is interest-free for the first five years. You then need to secure a mortgage for the remaining 75% (55% in London).

For example, if you're buying a £250,000 home:

  • You put down a £12,500 deposit (5%)
  • The government provides a £50,000 equity loan (20%)
  • You get a £187,500 mortgage (75%)
After the initial five-year interest-free period, you'll pay an annual fee of 1.75% on the outstanding loan amount. This fee increases each year by inflation (RPI) + 1%.

Eligibility Criteria

To be eligible for Help to Buy, you must:

  1.  Be at least 18 years old
  2. Be a first-time buyer
  3. Be able to afford the mortgage repayments and other costs
  4. Purchase a property within the regional price cap for your area

Remember, you can't use Help to Buy for second homes or buy-to-let properties, and part-exchange isn't available through the scheme.

Pros and Cons

Pros:
  • Lower deposit requirement (only 5%)
  • Interest-free equity loan for five years
  • Access to more competitive mortgage rates
  • Helps you buy a home you might not otherwise afford
Cons:
  • Limited to new-build properties
  • The amount you owe can increase if your property value rises
  • Interest rates on the equity loan increase after five years
  • Potential for negative equity if property prices fall
The Help to Buy scheme offers significant support from the government, making homeownership more accessible for many first-time buyers. However, it's crucial to weigh the pros and cons carefully before deciding if it's the right option for you.

Comparing Deposits and Costs

When you're considering a first-time buyer scheme, understanding the financial implications is crucial. Let's compare the deposits and costs associated with Shared Ownership and Help to Buy.

Shared Ownership Deposits

With Shared Ownership, you're required to put down a deposit on the share you're purchasing, not the full property value. Typically, this ranges from 5% to 10% of your share's value. For instance, if you're buying a 25% share of a £500,000 property (£125,000), your deposit could be as low as £6,250 for a 5% deposit or £12,500 for a 10% deposit.

Help to Buy Deposits

Help to Buy requires a minimum 5% deposit on the full property value. For a £500,000 home, you'd need to save £25,000. While this is higher than Shared Ownership, the government's equity loan counts towards your deposit, potentially allowing you to secure a mortgage more easily.

Ongoing Costs Comparison

For Shared Ownership:

·         You'll pay a mortgage on your owned share
·         Rent on the remaining portion to the housing association
·         Service charges and ground rent may apply
·         As you increase your share (staircasing), your mortgage payments will rise, but rent will decrease

For Help to Buy:

·         For the first five years, you only pay mortgage repayments and a £1 monthly management fee
·         After five years, you'll start paying interest on the equity loan
·         Interest starts at 1.75% annually, increasing with inflation each year

Both schemes offer government support to make homeownership more accessible. Shared Ownership often requires a smaller initial deposit, making it easier to get started. Help to Buy provides an interest-free period on the equity loan, potentially reducing your initial monthly costs. Consider your long-term financial goals and current savings to determine which scheme aligns best with your situation.

Conclusion

To wrap up, the first-time buyer scheme offers two main paths to homeownership: Shared Ownership and Help to Buy. Each option has its unique features and eligibility criteria, catering to different financial situations and preferences. The government's support under both schemes has an impact on making property ownership more accessible, with Shared Ownership allowing for smaller initial deposits and Help to Buy providing interest-free equity loans for the first five years.

When deciding between these options, it's crucial to consider your long-term goals and current financial standing. Both schemes come with their own set of pros and cons, from the flexibility of increasing your share in Shared Ownership to the potential for negative equity in Help to Buy. In the end, the choice depends on your personal circumstances, but both schemes offer valuable stepping stones to help first-time buyers get on the property ladder.

Reference: https://www.gov.uk/affordable-home-ownership-schemes

FAQs

1. Which is preferable for first-time buyers: Shared Ownership or Help to Buy?Shared Ownership involves both rent and mortgage payments since you're only buying a portion of the property, making it initially cheaper due to a smaller deposit. In contrast, Help to Buy only involves mortgage payments as it aids in purchasing a new build home through an equity loan.

2. What are some potential drawbacks of choosing Shared Ownership?Shared Ownership properties often come with additional costs as they are typically leasehold, particularly in urban areas where service charges can be high. Additionally, there may be limitations on making alterations to your property.

3. Does Shared Equity differ from Help to Buy?Help to Buy is a specific government-backed scheme that includes shared equity, where an equity loan assists buyers in purchasing a new build home. Thus, shared equity is a component of the broader Help to Buy scheme.

4. How does the Help to Buy scheme integrate with Shared Ownership?Help to Buy: Shared Ownership is a government initiative designed for those unable to afford a full mortgage. It allows buyers to purchase between 25% and 75% of a home and pay rent on the remaining share.

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