How to buy a house with no deposit
Often one of the biggest barriers to owning your own home is getting that all important deposit together. The Post Office believe they have come up with a solution to this, helping first-time buyers get on the housing ladder.
The ‘Family Link’ mortgage by The Post Office has recently been launched enabling first time buyers to get on the property ladder without needing any savings of their own.
The way this mortgage works is by combing a 90% mortgage with a 10% loan, the loan being secured against a parent’s or close family member’s own home. The important thing to note is that the parent’s property must be mortgage free.
The 90% mortgage is charged at a 5-year fixed rate of 4.98% and the 10% loan remains interest-free for the same period. For the first 5 years the purchaser makes two payments; one towards the parent’s mortgage and one towards their own mortgage. After 5 years the purchaser’s parent’s mortgage should be repaid and the Post Office will then consult with the purchaser to decide on a suitable remaining term of the mortgage.
This mortgage can only be used for properties purchased for up to £500,000 and only first-time buyers qualify. This applies to all purchasers of the property. To qualify you will also need to earn at least £20,000 and payments must be affordable.
Although this could be a huge help for first time buyers, it does not come without risks. If the buyer gets behind with mortgage payments, this could lead to their parent’s home being at risk of repossession. In addition, the 4.98% mortgage rate is relatively high. If a first-time buyer applied for a regular 90% mortgage and their parents took out a mortgage against their own home to provide the 10% deposit, this may well work out cheaper.
If the first-time buyer is not in a position to take advantage of this mortgage because their parents do not own a property, or are not mortgage free, there are other options available.
Help to Buy Loan
For example, if the property is a new-build, there are government Help to Buy loans whereby the buyer puts in 5% of the purchase price, the government contributes 20% (40% in London) and a mortgage is taken out for the remainder. The advantages here are that only a 5% deposit is required and the mortgage value is significantly reduced, meaning there will be access to better mortgage rates.
The Help to Buy loan remains interest free for the first 5 years, after which there will be a monthly administration fee, which starts at 1.75% of the loan and will increase every year. The government loan will not decrease in size unless it is repaid early and so these fees could become rather significant. The full loan must also be repaid either within 25 years, when the mortgage term finishes, or when the property is sold; whichever happens first. The loan will then be repaid at a percentage of the market value of the property at that time, not the amount that was originally loaned.
Help to Buy ISA
Another option available to first-time buyers is the Government’s Help to Buy ISA scheme, provided by a number of banks, building societies and credit unions. The ISA is used as a savings account whereby the government provides a 25% bonus on the savings. For example, for every £200 saved, the government provides a bonus of £50. The maximum bonus available is £3000.
When the purchaser comes to buy a property, the solicitor instructed to complete the conveyancing will apply for the bonus, once the bank, building society or credit union is aware that the ISA is being closed.
It is always worthwhile taking advice if you are considering taking out any of the mortgages discussed above.
If you are a first-time buyer looking to purchase a property then please contact our experienced Property Team at David Gray who will be happy to assist.