Options for getting on the property ladder

When it comes to buying your first property, it can seem out of reach for most young people due to the rising house prices and mortgage rates. As house prices have recently soared, the first-time buyer requires a significantly larger deposit than previous years or are having to rely on the bank of ‘mum and dad’ for a helping start. 

Your property could end up being one of the bigger assets in your financial plan over the long term and not having the burden of rental payments or mortgage payments later in life.

This article is aimed to provide information on investments aimed at and schemes available to first time buyers.

The Lifetime Individual Savings Account (LISA) explained

The LISA is an ISA that can be used upon first event of purchasing your first home or age 60.

To be eligible for a LISA:

• you must be between the ages 18 and 39 and UK resident
• the account must be opened by a sole person and cannot be opened jointly.

Each tax year, a contribution of up to £4,000 can be made. The government will provide a bonus of 25% of the amount contributed by the policy holder.

As the maximum someone can put into a LISA is £4,000 each tax year, the maximum the government will contribute through a bonus is £1,000 per tax year.

The LISA limit of £4,000 forms part of your overall ISA allowance of £20,000 (2024/25 tax year). The government bonus does not count towards your LISA allowance of £4,000 or overall, ISA allowance of £20,000, and once the money is placed into a LISA the government bonus will be applied within 6-8 weeks. This can be invested or held in cash depending on your needs and timescales.

To withdraw a LISA to purchase a property, you must be a first-time buyer and have opened the LISA a minimum of 12 months prior to needing the funds. Even if you are purchasing a property with someone who has already owned a home, you can still use the LISA towards the price of the property.

For the LISA bonus to be used, the property must fall into the following criteria:

• be in the UK
• have a purchase price of no more than £450,000
• be the only residence you own
• be where you intend to reside full time
• be purchased with a mortgage
• you must be a first time buyer.

If you wish to withdraw your LISA for any other reason (before age 60), the government will take a withdrawal charge of 25%. For example, if you have invested £800 and the government have added a bonus of £200 and you wish to full encash the whole pot, you will encounter a fee of £250 which will leave you £50 short of your original investment.

There was some dialogue recently from public figures such as Martin Lewis before the March Budget 2024 around removing the purchase price cap or the penalty for removing the fund from a LISA due to the increased house prices. The cap of £450,000 especially in and around London, does not go very far in today’s market but the government retained the current LISA structure in the recent Budget.

Although LISAs can be a great vehicle to get you on the property market, providing a 25% return on £4,000 risk free, it is not appropriate for everyone due to the above restrictions which need to be considered on a case-by-case basis.

The government previously offered a Help to Buy ISA, which involves the government topping up your savings by 25% with a maximum of £3,000, but this scheme closed to new accounts on 30 November 2019.

Other options

There are other options available which may help you get on the ladder, some of which have been highlighted below. For a full breakdown of the schemes available, please visit the government website for more information.

The First Home Scheme

This is where a discount is offered to first time buyers or key workers on new builds. The discount can vary between 30% and 50% meaning you would need a smaller level of borrowing to access the market and your deposit needed will therefore be smaller.

• The following conditions must be met:
• you must be a first time buyer in the UK
• the mortgage must cover at least 50% of the value
• the home must cost less than £250,000 or £420,000 if you live in London
• household income must not exceed £80,000 or £90,000 if you live in London
• the discount you received must be passed onto the next buyer.

Mortgage Guarantee Scheme

A popular mortgage offered to help first time buyers is the 95% mortgage scheme. This scheme allows you to put down 5% of the property value as a deposit and the mortgage lender loans you the remaining 95%.

The 95% mortgage operates as any usual mortgage would, and majority of lenders facilitate these mortgages as the government has agreed to shelter some of the cost should the lender lose money.

• The following conditions must be met:
• the house must be in the UK
• the property has to be worth less than £600,000
• property can’t be a new build
• must have a 5% deposit amount of the properties purchase price
• must be a repayment mortgage
• must pass the lenders affordability assessment.

The length of mortgages can also make a difference, some mortgage lenders offer mortgages that are payable over a 35-40 year term meaning the monthly repayments can be more affordable. However, the longer the term, the more interest you will end up paying. It’s important to liaise with a mortgage adviser to get the best rate and term.

Shared Ownership

This scheme allows first time buyers to own a ‘share’ of a home. The remainder of the property is rented from the Housing Association who own the unsold percentage of the property.

First time buyers can purchase as little as 10% of a home and lease the rest. The buyer would need a minimum of 5% for a deposit on the amount they would like to buy. In time you can purchase more of the property, this is known as ‘staircasing’ and it allows first time buyers to buy a property bit by bit rather than having to save a large deposit.

The rent paid to the Housing Association is usually 3% of the value of the unsold equity. For example, if the unsold equity equals £180,000, you will be charged £5,400 per year or £450 per month.

To be eligible for a part rent part buy property, applicants must be first-time buyers and their combined annual income must be less than £80,000 or £90,000 in London.

When purchasing this type of property, you will still have to pay 100% of the service charges that are due. You also need to seek approval from the Housing Association before you can sublet or make any changes to the property.

Summary

This is not one size fits all, and a strategy for one party may not be right for you and your family so it is important to understand all options available to you before proceeding.

Alternatively, if you are considering helping the next generation get on to the property ladder do not hesitate to contact us today to discuss legacy planning.