Options for first-time buyers with small deposits

High street brands including Halifax, Royal Bank of Scotland, NatWest, Santander, Nationwide, Leeds Building Society and Woolwich offer these deals, says Mr Murphy, with some joining the market since the government introduced Help to Buy.

There are two phases of the Help to Buy scheme:

• a shared equity loan scheme that offers a loan of up to 20 per cent of the value of the property to buyers with as little as 5 per cent deposit to enable them to access a wider range of lower LTV loans, which has been running since the 2013 Budget and has now been extended to 2020; and

• a mortgage guarantee scheme that offers lenders protection against a portion of losses on loans to buyers with as little as 5 per cent deposit, which has been responsible for the introduction of a new wave of 95 per cent LTV mortgages.

Phase 1: Shared equity loan scheme

The Help to Buy shared equity scheme is available on new build properties only for both first-time buyers and existing homeowners, up to a maximum property value of £600,000. The home the borrowers wish to get a mortgage on must be their prime residential property.

With the equity loan scheme buyers can borrow 20 per cent of the purchase price from the government. They will not have to pay anything back for the first five years, with charges starting at 1.75 per cent from the sixth year and rising each year at RPI plus 1 per cent.

Ian Wilson, head of Halifax Intermediaries, says it is worth noting that the owner will be entitled to sell their home at any time, but if they do so they will have to pay back the loan which may then be more than they originally borrowed if the property has increased in value.

Phase 2: Mortgage guarantee scheme

For a borrower, Help to Buy is the same as a traditional mortgage with a 95 per cent LTV, but for the lender the government guarantees a portion of the loan.

The Help to Buy mortgage guarantee scheme is available on properties worth up to £600,000 and to both first-time buyers and existing homeowners. Applicants cannot have an equity interest in any other property and it must be their primary residential property.

The government guarantee that accompanies this scheme covers 15 per cent of the lender’s liability minus a lender contribution of up to 20 per cent of any losses, meaning the government is effectively insuring forbearance costs up to 14.25 per cent of the property value. There is no guarantee offered to the borrower.

Shared ownership

Shared ownership may also be an option for low-deposit buyers. A way of part-owning, part-renting a property that is designed for people who can’t afford to buy a home outright, this is available through housing associations and there are both government-backed and privately-operated schemes.

With shared ownership, Mr Wilson says the purchaser would buy a stake between 25 per cent and 75 per cent of the market value of the property with a mortgage. He says they would then pay rent on the remaining share of the property, which is owned by the local housing association.

NewBuy

Another government-backed deal introduced in recent years is the New Buy indemnity scheme, which is available through a selected panel of builders and developers for new homes including flats, conversions, refurbishments and renovations.

It is open to first-time buyers and existing homeowners and the maximum property value is £500,000. Homebuyers can apply with just a 5 per cent deposit as the builder/developer and government share the funding of the indemnity scheme.

Alternatives to support schemes

And it is not just government backed schemes that offer those with small deposits a chance to get a mortgage. Mark Bullard, head of sales at NatWest Intermediary Solutions, says his lender will consider gifted deposits and equity.

Gifted deposits are where parents and/or guardians put up the equity downpayment, which Lenders will accept as the homebuyer’s own.

Gifted equity is buying off a family member. This is where the homebuyer receives a gift of equity from their parents and/or guardians through a deed of gift. The maximum loan amount in the cases can be based on the valuation not the purchase price, according to Mr Bullard.

Brad Fordham, managing director of Santander for Intermediaries, says lenders are also now offering 95 per cent LTV mortgages once again outside of the Help to Buy and New Buy scheme.