HOPEFUL homebuyers with small savings pots have more ways to grab a rung on the property ladder, as new firms compete to boost deposits.
Runaway house prices mean that saving the huge down payment preferred by mortgage lenders is a tough task.
As the government’s Help to Buy scheme closes next year more firms are now cropping up to mirror the initiative, allowing home hunters to borrow a large chunk of their deposit.
We take a look at the schemes and explain their pros and cons.
Generation Home is a new lender that offers a “deposit booster” option where any number of friends or family can put money towards a borrower’s savings.
Co-founder Sophia Guy-White describes the arrangement as “DIY Help to Buy” but, unlike the government scheme, borrowers aren’t limited to new-builds and can previously have owned a property.
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Usually mortgage lenders want money from family towards a deposit to be officially declared as a gift.
But Generation Home instead provides a binding agreement that allows parties to either gift, provide an interest-free loan or give an equity loan.
Other firms are willing to loan the money for a deposit to use with traditional mortgage lenders.
Even offers interest-free equity loans to first-time buyers that can triple a buyer’s deposit.
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Founder Ben Bailey says many of its customers are young professionals stuck in a “rent trap” which stops them saving for their first home.
As with Help to Buy, buyers must have a deposit of at least 5% and Even will take a percentage stake in the property.
This means the lender will benefit from any value increase on the property – or take a loss if the property loses value – when the loan is repaid.
Even limits itself to first-time buyers and the loan can’t be used for new-builds or buy to let.
Proportunity and Ahauz are another two lenders offering equity loans to borrowers with a deposit of at least 5% and are not restricted to first-time buyers.
Both providers will lend up to 25% of the property value up to £150,000, and both charge interest on the loan which needs to be repaid monthly.
Borrowers can use the loans for newbuild or previously-owned homes.
Richard Dana co-founder of mortgage broker Tembo says he is seeing strong demand for these schemes from people who have been locked out of homeownership with sales growing by around 40% a month.
He adds: “The great benefit is that buyers can dramatically increase the amount they can afford, meaning they can finally get a foot on the property ladder.”
What do you need to consider?
Borrowing money for a deposit tends to be more expensive than a traditional mortgage, though monthly repayments are often lower than the equivalent rent, according to Richard.
However, not all mortgage lenders accept the loans, so choice is restricted.
For example, Even is currently only available to use through Kensington Mortgages though the firm said it hopes to work with more high street banks soon.
David Hollingworth from broker London & Country says: “Lender choice is likely to be more limited, as not all lenders will be in a position to lend alongside these schemes.
“It’s therefore important to understand how each scheme works along with potential costs and crucially to understand that an equity loan will also see you give up some growth in value.”
Interest rates and products fees on the equity loans can be fairly hefty and are a cost that need to be factored in. Rates start from around 6% and run up to 9% depending on the provider and individual loan.
On a loan of £60,000 at a rate of 8.49%, monthly repayments would work out at £424.50.
Some providers only fix the rates for a set period of time before it flips to a variable rate linked to the Bank of England’s base rate.
Having this additional monthly cost can actually act as a drag on what a mortgage lender will provide, despite the extra deposit. For some borrowers, getting a bigger mortgage may not be worth the added costs.
Borrowers typically need a clean credit history to access the loan schemes, so anyone with serious blips on their record is unlikely to qualify. Credit checks will be carried out as part of applications.
Some of the lenders also require minimum incomes. For example, Proportunity asks for applicants to be earning at least £30,000.
Most of the schemes can only be accessed through a mortgage broker who should be able to clearly explain costs and options for individual borrowers.
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Each week we speak to first-time buyers about how they got the property ladder in our My First Home series.
And one single mum reveals how she paid off her mortgage eight years early to be mortgage-free at age 47.
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