The new First Step mortgage lets you put down 2% of the property price of the home you want to buy, with a minimum deposit of just £5,000 – but gifted deposits won’t be accepted
A building society has launched a new low-deposit mortgage – but you won’t be able to use it if you’ve been gifted money from your family.
The new First Step mortgage from Newcastle Building Society lets you put down 2% of the property price of the home you want to buy, with a minimum deposit of just £5,000.
However, you won’t be eligible if you have received help with your deposit from the Bank of Mum and Dad, as gifted deposits are not allowed. Newcastle Building Society says the idea of its First Step mortgage is to help people who don’t have access to financial help from their family.
The lender stills accept gifted deposits across some of its other mortgage products. The purchase price of the property for the First Step mortgage must be between £101,000 and £350,000.
The repayments will be fixed at 5.25% interest for five years, and no guarantor is needed. The obvious advantage of low deposit mortgages are that you can get on to the property ladder quicker, as you wouldn’t need to spend as long of a time saving.
However, the main risk is the chance of falling into negative equity if property prices fall. Negative equity is when the value of your property falls below the amount owed on the loan used to purchase it.
Interest rates on low deposit mortgages also tend to be higher, which means you will end up paying back more in the long-run.
Ben Smith, head of commercial and product development at Newcastle Building Society, said: “We’re committed to helping First Time Buyers whatever their background, and our mortgages support a range of people and their circumstances, including those with gifted deposits.
“First Step has been designed for homebuyers in particular who’ve worked hard to save a deposit by themselves, and are ready to get on the property ladder.”
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Not everyone can be reliant on the ‘Bank of Mum and Dad’ to get a foot onto the property ladder. This is why it’s so fundamental for lenders to support buyers with small deposits, to keep the market moving.”
Other mortgage help for first-time buyers
Lifetime ISA: With a Lifetime ISA (LISA) account, you can get a free 25% cash boost from the Government if you’re saving for your first home or retirement. You can save up to £4,000 each tax year, meaning the maximum bonus you can pocket is £1,000. The maximum bonus is £33,000 if you open it at 18, and max it out until you turn 50 – you can’t pay into a LISA beyond the age of 50. Anyone who is aged 18 to 39 can open a Lifetime ISA for free – and if you’re in a couple, you can open one each. You’ll pay a penalty and lose your bonus if you take money out of your LISA account for anything other than your first home or retirement.
Shared ownership: This is where you buy a share of a property – between 25% and 75% of the property value – and pay rent on the rest. The share you can buy is usually between 25% and 75% but can be as low as 10% on some homes. You can often buy additional shares – known as “staircasing” until you own 100%. You need to have an income no greater than £80,000 a year or £90,000 a year in London. Your combined income can’t be greater than these caps if you’re buying as a couple.
Mortgage guarantee scheme: These types of mortgages allow savers to put down a 5% deposit and the government acts as a guarantor if they miss a payment. Guarantor mortgages are available to anyone buying a property costing up to £600,000, unless they are investing in buy-to-let or second homes. Some lenders also offer 5% mortgages outside of the government-backed scheme that may be cheaper for borrowers.
Guarantor mortgage: These type of deals see the mortgage secured by a guarantor, who agrees to pay the mortgage if the borrower can’t. The guarantor often has to use their home or savings as collateral for the mortgage, but their name is not included on the deeds of the home and they don’t own any share of the property. They have to step in and make repayments on the mortgage if you’re unable to.
First Homes scheme: The First Homes scheme allows first-time buyers to get a discount of between 30% and 50% on the value of a new-build property. The homes cannot cost more than £420,000 in London, or £250,000 anywhere else in England, after the discount has been applied. Councils can impose lower price caps. To qualify for the scheme, you’ll need to have had a household income of £80,000 or less, or £90,000 or less in Greater London. You also need to take out a mortgage of at least 50% of the purchase price of the property.