- Many companies offer ‘deposit boost’ plans for first time buyers
- Ahouz recently launched his offering due to a new firm
- Users should be wary of interest charges which can be high
- Other options include help-to-buy and guarantor mortgages.
- We run the rules about what buyers’ options are and what they should be looking for
The stratospheric home price increase over the last year may have some homeowners rubbing their hands gleefully, but that’s not the case for first-time buyers.
According to Halifax data, with an average increase of £23,600 since June 2020, many are finding that the dream of owning a home is taking off from them – especially as the price increase is out of kilter with wages.
For those who do not have high salaries, or families that have large sums of money to gift them, raising deposits is often one of the biggest challenges.
The financial sector has recognized this and designed a range of products to help first-time buyers lump that important lump sum together, but what are they and is taking a wise step?
Deposit loan schemes can help first-time buyers raise enough money to buy their home – but they can also come with hefty interest charges.
Deposits matter, because they get you a better mortgage rate and protect you from negative equity.
‘For anyone looking to buy their first home, the more savings they have to keep as deposits, the better, the lower the debt-to-value ratio, the lower the interest rate, and the lower the risk of negative equity. The risk will be less. says Katie Braine, consumer banking specialist at the financial information business Defaqto.
‘But with home prices at a high level it can be very difficult for people to save enough, especially if they are paying for rent or live on their own.
‘Thankfully there are various mortgage and government schemes to help first time buyers.’
The latest scheme, Ahuja, was launched recently. It offers equity loans of up to 25 percent of the value of their property to first-time buyers, which they can combine with their existing deposits to get a better mortgage deal and cheaper monthly payments – as well as potentially giving them access to their bank accounts. help meet the criteria. Around maximum borrowing based on salary.
However, the interest on the loan is charged at a whopping 6.99 per cent.
Taking out a loan or other help will always be more expensive than saving up the old-fashioned way — but for some it may be better to pay for more years of rent and savings.
So what are the different options, and what should buyers be aware of when considering them?
We run the rules on what’s in the market right now.
Unlike Help to Buy, Ahuja can be used on period properties, not just new construction
What is this? Ahuja offers an equity loan to first time buyers, which they can use to increase their deposits. This, in theory, allows them to get a better mortgage rate and potentially a bigger home than they could otherwise afford.
The company will lend up to 25 percent of the value of the property to the buyer, but the buyer himself will have to put down 5 percent.
Interest on the loan, which is a second fee mortgage, is paid monthly, on top of the primary mortgage payment.
Buyers have their entire first charge mortgage term — usually 25 to 40 years — to pay off the loan balance.
The loan is based on the value of the home, so if they borrowed 20 percent of the home’s value today, they’ll pay back 20 percent of its value on the day they repaid — whether that figure goes up or down.
They could have paid it back from the proceeds of the house when they eventually sold it.
But they can also return it quickly without any penalty charges. The sooner they pay it back, the less interest they pay.
First-time buyers can probably buy a better home if they’ve borrowed some money on their deposits — but they need to weigh whether the interest charges are worth it.
watch out for: The interest charged on the loan is a minimum of 6.99 percent. This is much higher than typical mortgage rates, which can go as low as 0.94 percent for someone with a 70 percent deposit. The company justifies this by saying:
‘Although this rate is higher than normal mortgage rates, it applies only to small Ahoud loans, making the compound rate of the primary mortgage and Ahoud loan less than 2.9 percent’
This figure is an example, based on a 75 percent loan-to-value mortgage at 1.3 percent and a 20 percent loan from Ahuja. The rate will depend on the exact rate of the secured mortgage.
Currently, the lowest rate available on a 5 percent deposit mortgage is 2.74 percent, although this comes with a £900 fee.
With mainstream mortgage rates potentially in the same ballpark as the ‘compound’ rate, the main benefit of using a plan like Ahouz will be to improve your debt-to-income ratio and get a more expensive home. Do it, otherwise you will be able to afford. .
The interest on equity loans can also change. Ahuja Equity Loan is a 5-year fixed interest rate product, thereafter running at a variable rate. The variable rate is tied to the Bank of England’s base rate, so it will increase if it goes up.
Expert’s verdict: The major issue for borrowers using plans like Ahuja is whether their mortgage lender will view equity loans the same way they view cash deposits.
Martin van der Heijden, Habito’s chief financial officer, says: ‘The company’s example shows that there can be a small impact on how much people can borrow.
Lenders will treat the scheme as a loan and apply rules about how safe and economical the total borrowing is, depending on how much you can spend on the home.
When it comes to what mortgage rates they can get, lenders may also consider a borrower as ‘likely to walk away’, such as someone with a 5 percent deposit, and consider these applicants Can’t be treated the same way…