First-time buyer finance: is shared-ownership, Help to Buy or a traditional mortgage the best way to buy?

Question: My partner and I are both 29 and have a combined salary of £87,000, a joint deposit of £50,000, and we want to buy a two-bedroom flat. He works in the West End in an art business start-up, and I work in the City. With our joint salaries do we qualify for a new-build shared-ownership flat, or a Help to Buy equity loan? Or should we go for an older property and look for a straightforward joint mortgage?

Answer: Congratulations on having saved £50,000 for a deposit. That puts you in a great position. How you move forward from here depends on whether you want the glitz and glamour of a new development, or a potentially more affordable older property, possibly a conversion in a Victorian terrace.

If you dream of a swanky new pad, you will probably need to consider taking out a government equity loan, as even with your impressive budget of £398,000 — £410,000 from the end of April — a two-bedroom new build is still a little out of reach. For example, Galliard’s ready-to-go two-bedroom flats in Deptford are currently being marketed at £500,000.

The Government’s scheme for new build unlocks such homes by loaning up to 40 per cent of the purchase price at zero per cent for five years, in exchange for the equivalent amount of equity in the property. The scheme is only available on new builds to maximum price of £600,000.

On a £500,000 property, this means a government loan of up to £200,000. To qualify, you would also need to put down at least a five per cent deposit (which you easily have) and take out a repayment mortgage for the rest — also achievable on your combined salaries.

There are three important considerations with equity loans. First, you will not own all of your home. This means that if house prices rise, so will the amount you need to repay the Government. A lumpy repayment could make it harder for you to reach the next rung on the ladder in future.

Secondly, after year five you start to pay annual fees on the loan. These start at 1.75 per cent, or £3,500 on £200,000, and rise by the annual rate of inflation as recorded by the Retail Prices Index plus one per cent each year. Remember, RPI is typically higher than the Consumer Prices Index measure of inflation, and the Bank of England expects CPI inflation to move back to two per cent over the next two years. So the fees could quickly become meaningful. Finally, the Government’s scheme is allowing you to reach that bit further than you could afford on your own. In five years’ time, you may want to re-mortgage to repay the government equity loan and avoid the rising annual fees. Do you think your incomes will have risen to allow this? You will, of course, have possible service charges to pay annually on the new-build scheme.

If you want to go for an older property, maybe one of London’s many terrace homes with Victorian charm, look east or at other fringe areas. Leyton is just a 14-minute hop on the Central line to Bank and 24 minutes direct to Bond Street — ideal for both of your commutes.

It’s also just one stop from the multitude of facilities in Stratford. Here, you can still buy a two-bedroom flat in a Victorian conversion for under £400,000. And your hard work in saving £50,000 means that you would be able to put down at least a 10 per cent deposit, which is the minimum required by most banks for a residential mortgage. If not, you could still buy in this area by taking advantage of another of the Government’s Help to Buy schemes: guaranteed mortgage.

Unlike the equity scheme, this can be used on old or new builds, providing the home is your only property; that it is priced under £600,000, and you can put down at least a five per cent deposit. However, as these mortgages tend to have a higher rate to compensate for the lower deposit, you are likely to be better off with a standard residential mortgage.