New Help to Buy and shared ownership: how do updated government home buying schemes work?

The Government’s flagship scheme for first-time buyers relaunches next year, and applications for Help to Buy 2.0 can be submitted from today.

In fact 2021 is a big year for so-called affordable housing schemes because a shake-up of the shared ownership scheme is also underway.

“One of the biggest problems first time buyers face when getting on the property ladder is raising the deposit, especially with 15 per cent plus deposits required since the market re-opened after lockdown,” said property expert Kate Faulkner, of reallymoving.com.

“Both the new shared ownership and Help to Buy schemes tackle this key issue, but they also help to solve the underlying property problem of a lack of stock in some areas which has caused first-time buyers to be priced out in the first place.”

From April 2021 Help to Buy — which uses government loans to supplement buyers’ deposits and mortgages — will only be offered to first-time buyers.

Lawrence Bowles, a director in Savills’ residential research department, feels this won’t cause too much upset. “At the moment 95 per cent of these sales in London are to first time buyers,” he said.

The scheme only applies to new homes, and spending caps based on local prices will be introduced. The London cap is unchanged at £600,000, and first time buyers can borrow up to 40 per cent of the price of their chosen property. In the South East the cap will be £437,600 and buyers can borrow up to 20 per cent.

Help to Buy is too expensive for many buyers, and their best chance of buying a property is to look to shared ownership instead.

Buyers purchase a portion of a property, which means they need a smaller deposit and less mortgage funding. They also pay rent on the portion of the property they don’t own.

The first thing to note about the changes is that although they come into force in April, it will take a year or two for buyers to feel the effects.

“New homes take 18 to 24 months to deliver,” said Kush Rawal, director of residential investment at Metropolitan Thames Valley housing association. “It may be quite a while before we see the new product on the shelves.”

When they do start to drip through, buyers will be able to opt to buy a 10 per cent share of a property — at present the minimum share is usually 25 per cent.

While delighted that this will make home ownership more affordable to more people, Rawal is worried that mortgage lenders might be slow to embrace the idea of loaning these relatively small amounts. He is also concerned that people who own a small sliver of a property will still have to take on full service charge payments.

A key plus point of the new arrangement is that shared owners will no longer be responsible for unexpected repairs and maintenance bills — they will still pay service charge to cover everyday upkeep, but will be shielded from any catastrophic issues like the current cladding scandal.

Meanwhile, “staircasing”, the method by which shared owners can increase their stake in their property, is also changing. Under the new format they will be able to staircase in one per cent increments rather than the current 10 per cent.

Bowles says owners must think hard about whether this is actually worthwhile. They will have to pay legal costs each time they up their share — and mortgage finance might again be a problem in the current restricted lending climate.

His advice is to do the maths: calculate whether leaving your share as it is and putting any extra money into overpaying your existing mortgage would be cheaper than upping your share and reducing your rental costs (but increasing your mortgage payments).

This will depend on what interest rates are doing — and you also need to factor in whether house prices are rising or not (there is no point buying extra shares in a home when prices are on the downturn).

There tends to be more choice of H2B homes than shared ownership ones which are nowhere near plentiful enough to satisfy demand in London.

Private flats within a development tend to get the better positions and higher floors (and therefore best views). Shared owners are sometimes barred from on-site sports and leisure facilities, although on the flip side this means that their monthly service charges are lower.

There is no income restriction on H2B. Shared Ownership in London is only for households with an annual income of less than £90,000.

The minimum H2B deposit is five per cent of the outright cost of the property. With shared ownership it is five per cent of the portion you buy – entry costs are therefore significantly lower.

Under H2B you need to be able to get a mortgage of 55 per cent. On a property worth £500,000 this would be £275,000 which would require a household income of close to £70,000. If you bought a 25 per cent share of the same flat you would only need a mortgage of around £125,000, which would require an income of around £30,000.

Monthly costs go up under both schemes. Shared owners get annual rent increases, while H2B owners must start paying interest on their extra loan after five years.

Without lockdown Lenna Soifer and Evan Shapero would probably still be renting a flat and dreaming of home ownership.

But while taking long walks with their dog Renzo they stumbled across Bower & Barnabas (www.bowerandbarnabas.co.uk), a church conversion in Woodside Park, north London.

Lenna, 24, and Evan, 25, loved the look of it, and realised they could afford to buy a £550,000 one bedroom flat. They moved in in October, just in time for Lockdown 2.0.

Lenna, a jewellery designer, and Evan, who works in Fintech, hadn’t properly understood the Help to Buy scheme before they used it, but their mortgage advisor explained the ins and outs, they realised they could get onto the property ladder.

“Young people, particularly in London, think they cannot afford a home due to the prices but we have been able to make it work,” said Lenna.

The couple are actually better off as homeowners – their £1,600pcm rent has now been replaced by mortgage repayments of just under £1,000pcm.