First-time buyers in Scotland have been handed a boost with the launch of a new scheme that offers interest-free loans of £25,000.
The Scottish Government’s First Home Fund, which was originally announced in the Spring, has today opened to applicants.
Here, Which? explains how the First Home Fund works, including which lenders are involved, how to apply and details of how the scheme compares with Help to Buy.
Scotland launches First Home Fund
The Scottish Government has pledged £150m of funding for a pilot of its new scheme for first-time buyers.
The government’s contribution is secured as a percentage of equity in the property, so if you’re buying a £125,000 house, the £25,000 will be set at 20% of the home’s value.
As it’s an equity loan, in this scenario you’ll need to pay back 20% of the home’s value when you come to sell.
This means you could pay back more or less than the original £25,000, depending on whether house prices rise or fall.
The pilot will run until March 2021 and could help around 6,000 people buy their first home.
- Find out more: First Home Fund – guidance from the Scottish Government
Why is the government launching this scheme?
The Scottish government says its existing homeownership schemes have helped more than 32,000 households purchase a property since 2007.
It believes the First Home Fund will provide greater assistance to those from lower-income backgrounds.
Scottish housing minister Kevin Stewart says: ‘Some first-time buyers trying to buy a home can call on the financial help of relatives or friends, but for many, saving a deposit can be an obstacle.
‘This isn’t fair, so we’re helping first-time buyers raise the deposits they need.’
How is this different to Help to Buy Scotland?
Help to Buy Scotland, which offers an equity loan on new-build properties, will continue to run alongside the new scheme.
Help to Buy works differently in a number of ways. First of all, it’s only available on brand new properties that cost up to £200,000, whereas the First Home Fund is available on all properties.
Secondly, the maximum equity loan you can borrow with Help to Buy is 15% of the property price – that’s £30,000 on a £200,000 home.
Is the First Home Fund better than Help to Buy?
The First Home Fund will play a slightly different role to Help to Buy.
By setting the maximum loan at £25,000 but allowing this to cover up to 49% of a property’s value, the scheme could be very useful in helping people with the smallest incomes get on to the property ladder.
Indeed, the 49% limit means that you could get a £25,000 loan on a property than costs just £52,000.
First Home Fund vs Help to Buy: an example
If you wanted to buy a home for £120,000, you’d be able to borrow the maximum of £25,000 when using the First Home Fund – that’s 21% of the property’s value. Under Help to Buy, however, you’d be limited to £18,000 – that’s 15% of the value.
This can be a double-edged sword. In this example, you’d be able to get a smaller mortgage using the First Home Fund, meaning you could find it easier to get accepted, and your monthly repayments would be lower.
On the other hand, you’ll own less of the property outright than if you used Help to Buy.
First Home Fund: the fine print
The Scottish government says that seven lenders have currently signed up to offer mortgages for the First Home Fund. They are as follows:
- Glasgow Credit Union
- Leeds Building Society
- Lloyds Banking Group
- Scottish Building Society
- Scotwest Credit Union
If you apply successfully for the Fund, you’ll be given an ‘Award Letter’, which will allow you three months to finalise buying the house.
You’ll need to pay a fee of £550 to the Fund’s administering agent when you apply, although this will be refunded if the application is rejected or falls through.
Buying above the market value
When you apply for a loan, the government will assess the market value of the property to decide how much equity the £25,000 will represent.
If you then go on to buy the home for above the market value, the government will still base its share on the original valuation.
So if the government says the £25,000 represents 20% of the equity, but you get into a bidding war so it only covers 15%, the government will still demand the 20% when you come to sell.
While there’s no set purchase limit with the First Home Fund, your mortgage must cover at least 25% of the purchase price.
Once you’ve bought the home you can increase your share of equity in chunks of 5%. Once you reach 90% or higher, any further increase must be to take you to full ownership.
Letting your home
You can only apply to buy a home to live in yourself. The scheme isn’t available for buy-to-let properties.
Buying your first home in Scotland
According to the latest Land Registry data, first-time buyers in Scotland are currently paying an average of £124,132 to get on to the property ladder.
First-time buyers in Scotland also benefit from the fact that very few have to pay any Land and Buildings Transaction Tax (LBTT), which only kicks in at £175,000.
You can find out more in our guide on buying a house in Scotland.