Thinking about buying your first home in the next couple of years and wondering if it’s worth waiting for the Government’s new discounted starter homes scheme?
The answer to this will depend on a number of factors but experts say your decision should centre around how long you plan to keep the property before moving on. if you live there for five years or more a starter home may be the best option, but if you plan to move sooner you may be better off with the Government's other newbuild scheme Help to Buy.
This week, David Cameron announced accelerated plans to build more than 200,000 discounted starter homes for first-time buyers aged under 40. A 20pc discount will be offered on the homes which will be worth up to £250,000 outside London and £450,000 inside London. The homes will be built on brownfield land - under-used or unviable commercial or industrial sites.
How much will I need to put down?
Commentators expect borrowers will need a 5pc deposit.
How will this compare to other options available to first-time buyers who are struggling to get on the property ladder?
The closest alternative is Help to Buy 1, which is aimed at first-time buyers looking to purchase a new-build property. Buyers borrow up to 20pc of the value of a newbuild home from the Government, interest-free, for the first five years. Borrowers need a 5pc deposit and must take out a mortgage to cover the remaining 75pc of the cost of the property.
Where will the homes be?
We don’t yet know where the Government will build its starter homes, so the scheme may or may not be available to you depending on where you want to live.
It's worth noting the major house-building plans set out by the Government, as it would seem probable that discounted homes would be included. Last year’s Budget outlined plans to create a new locally-led garden city at Ebbsfleet, Kent, capable of providing up to 15,000 new homes, for instance. It's also worth watching the £1bn Large Sites Infrastructure Programme, which considers areas for development. Areas that have already had investment include Cranbrook in Kent, Sherford in Devon and Wokingham in Berkshire.
Help to Buy vs discounted starter homes
Aside from location, you should carefully consider how long you will keep the property. In many cases, if you live there for five years or more a starter home may be better, but if you plan to move sooner you may be better off with Help to Buy.
This is because the interest rate you will pay on your mortgage depends on the size of your loan compared to your deposit. Even though both schemes call for a 5pc deposit, with Help to Buy the 20pc interest-free Government loan means you are only borrowing 75pc of the purchase price.
“It’s about 2pc cheaper to borrow 75pc of the purchase price of a property than it is to borrow 95pc. That means that over five years, someone who buys a starter home will pay around 10pc more in interest than someone who buys through Help to Buy.”
This is where timing becomes crucial. The Government has said if you keep the starter house for at least five years, you can sell it at full market value, boosting your equity. This means that you are likely to recoup the extra money you paid out in interest.
But if you sell within five years you won’t get this uplift, so you’re better off paying the lower mortgage rate with Help to Buy. But bear in mind that you will have to start repaying the Government loan after five years, so your costs will go up if you decide to keep the home for longer.
The purchase price is likely to be higher, meaning you would need to find a bigger deposit to satisfy the 5pc minimum, but thanks to the Government loan and lower mortgage rates available you would pay the same in monthly repayments.
“This is great way for first-time buyers to trade up and buy a slightly bigger house that they can grow into. This will save the cost and hassle of moving to a bigger property in a few years time.