What could the new 2.5% deposit scheme mean for first time buyers?

A proposed government scheme could make it possible for eligible first time buyers to purchase a new build home with a deposit of just 2.5%.

Known as Your First Home, the scheme would combine the buyer’s deposit with a government backed equity loan of up to 20% of the property’s value. Ministers hope this will help address one of the biggest challenges facing first-time buyers: saving a large enough deposit.

However, the scheme has not yet launched and several important details remain unconfirmed. Here is what prospective buyers should know so far.

How is the your first home scheme expected to work?

Under the current proposals, an eligible first-time buyer would provide a deposit of at least 2.5% of the purchase price. The government could then provide an equity loan covering up to 20% of the property’s value.

The buyer would need to arrange a mortgage for the remaining balance.

On a qualifying home costing £250,000, for example, the purchase could potentially be funded through:

• A £6,250 buyer deposit

• A government equity loan of up to £50,000

• A mortgage covering the remaining £193,750

The government has said the equity loan would initially be interest-free. However, the length of this period and the charges that could apply afterwards have not yet been announced.

It is also important to remember that an equity loan is normally linked to the value of the property rather than being a fixed cash amount. The amount that needs to be repaid could therefore increase or decrease if the home changes in value.

Which properties could qualify?

The proposed scheme would be restricted to new-build homes sold by participating developers.

The government is also expected to introduce household income limits and local property price caps. These measures are intended to target the support towards the buyers who need it most.

The price limits could vary between different parts of the country, reflecting regional differences in property values. This may be particularly important in areas where the cost of a suitable new-build home is significantly above the national average.

Participating developers would also be expected to contribute towards the cost of the scheme.

Full eligibility requirements, regional price limits and the implementation timetable are expected to be confirmed at the Budget.

Could a 2.5% deposit make buying easier?

For many prospective homeowners, raising a deposit is one of the most difficult parts of buying their first property.

A lower minimum deposit could reduce the amount of time some buyers need to save. The initial interest-free period on the equity loan could also result in lower early borrowing costs than taking out a mortgage for a larger proportion of the purchase price.

However, the deposit is only one part of affordability.

Mortgage providers will still assess a buyer’s income, spending commitments, debts and credit history. Buyers should also allow for other expenses, potentially including legal fees, surveys, mortgage fees, removals and the costs of furnishing or maintaining a new home.

Why are some property experts concerned?

Although the announcement could provide welcome support for first-time buyers, concerns have been raised about its possible effect on new-build property prices.

As the scheme would give eligible buyers greater purchasing power but restrict that support to one section of the housing market, some industry commentators believe it could increase demand—and potentially prices—for qualifying new homes.

Similar concerns were raised about the former Help to Buy equity loan scheme. Research published by reallymoving in 2019 found that first-time buyers using Help to Buy paid a premium for new-build properties compared with buyers purchasing new homes without the scheme.

Prospective buyers should therefore compare the asking price of a qualifying development with other new and previously owned homes in the surrounding area.

The deposit required should not be the only consideration. Location, property size, specification, service charges, energy efficiency and future resale appeal can all affect whether a home represents good value.

What should buyers consider before using an equity loan?

Before making a decision, buyers should understand exactly how the equity loan would work over the longer term.

Questions to consider include:

• How long will the interest-free period last?

• What interest or fees will apply afterwards?

• When must the equity loan be repaid?

• Can it be repaid early or in stages?

• How will the repayment amount be calculated?

• What happens when the property is sold or remortgaged?

A qualifying new-build home will eventually be sold as a previously owned property, potentially without the same support being available to its next buyer. Its future value will depend on market conditions, demand, location and the condition of the property at the time.

Property values can rise as well as fall, and buyers should consider whether the home is likely to remain suitable if their circumstances change.

Should first time buyers wait for further details?

Your First Home is currently a proposal rather than an available buying scheme. Until the government confirms the complete terms, buyers will not know whether they or their preferred property will qualify.

Those already planning a purchase may still wish to investigate the options available to them now. Depending on individual circumstances, these could include low-deposit mortgages, shared ownership or purchasing a more affordable existing home.

Obtaining qualified mortgage advice can help buyers understand how much they may be able to borrow and which routes could be suitable for them.

Begin your search with Reeds Rains

The possibility of purchasing with a 2.5% deposit is likely to appeal to many aspiring homeowners. Nevertheless, the final rules, costs and restrictions will determine whether the scheme is the right option for each buyer.

Whatever route you are considering, research the local market, compare suitable properties and look beyond the size of the initial deposit before making a commitment.

Reeds Rains can help you explore homes available in your chosen area and understand the steps involved in purchasing your first property. 

Book a mortgage appointment today!

The Your First Home scheme remains subject to final government confirmation. Its eligibility rules, price limits, costs and launch date may change. Seek qualified financial and legal advice before committing to a property purchase. Your home may be repossessed if you do not keep up repayments on your mortgage.

The information contained within was correct at the time of publication but is subject to change. This is for information purposes only and does not constitute as advice