First Homes scheme - How it works and could you benefit?
The First Homes scheme aims to help local and key worker first-time buyers who have been priced out of buying locally onto the property ladder. The price you’ll pay for a First Homes property will be at least 30% lower than the market value, but there are a number of boxes to tick to qualify.
Being a local priced out of buying a property in the area which you call home can be frustrating. But with the introduction of the government First Homes scheme in July 2021 help may be at hand.
What is the First Homes scheme?
The First Homes scheme provides the opportunity for local and key worker first-time buyers to buy a new-build home in their local area for at least 30% below the market price. As a result, buying a property using First Homes could prove beneficial in lowering your deposit requirement and making a mortgage more affordable.
How does the First Homes scheme work?
The properties available under the First Homes scheme will always be new-builds but can be houses or flats, and should be no different to others that are part of the same development. In fact, the only point of difference should be the minimum 30% discount at which First Homes properties must be sold.
Local authorities have the power to offer even greater discounts – of either 40% or 50% – if they deem it necessary to make sure the properties are affordable to those locals for whom the First Homes scheme has been devised.
In the situation where a 30% discount is applied, it means that a property with a market value of £300,000 will be available to a qualifying first-time buyer for £210,000 (30% of £300,000 equates to a £90,000 discount).
Eligibility for the First Homes scheme
The eligibility criteria for the First Homes scheme involves some rules that are set firm, and others that afford local authorities a level of discretion in how they are applied. Note that the scheme is only available in England too.
First-time buyers only
You must be a first-time buyer to be eligible for First Homes and the home you want to purchase will be your main residence, and not a second home or used as a buy-to-let investment. If you’re buying with someone else, they must fit the definition of a first-time buyer as well.
This means that if you (or your co-applicant) have previously owned a property in the UK or somewhere else around the world, you won’t qualify for the First Homes scheme. Being previously gifted or inheriting a residential property will exclude you too.
Household income limits
Whether you want to buy by yourself, as a couple or as part of a larger group, your combined household income must be less than £80,000 to qualify for First Homes. A higher threshold of £90,000 applies if you’re buying in London.
You must take out a mortgage
Eligibility for the First Homes scheme also depends on you taking out a mortgage equal to at least 50% of the discounted value of the property. If you have sufficient funds available so that you don’t need a mortgage, you won’t qualify.
» COMPARE: First-time buyer mortgages
Maximum property values
To qualify under First Homes the discounted price of the property you want to buy must also be under £250,000, or £420,000 if you’re buying in London.
Criteria decided by local authorities
Officially, meeting the aforementioned criteria could be enough to secure you a property under the First Homes scheme. However, power has also been granted to local authorities to give priority to certain groups of buyers – more specifically, to those who want to set up home in their local area, and key workers who deliver essential services in the place where they work and want to live. In the spirit of the scheme, this additional criteria is extremely likely to be applied too.
Who qualifies as a key worker is determined by your local authority, but could include NHS workers, teachers and police who play a crucial role in their local area. To qualify due to local connections, you may already live in the area, need to live there because of your job, have family nearby, or provide care for someone who lives in the area.
Local authorities can apply such extra criteria for up to three months from a home going on sale. However, if a buyer isn’t found within that time, the property must be made available to anyone who meets the overarching First Homes criteria.
If you are a serving member of the Armed Forces, a divorced or surviving spouse, or a veteran who left service within the past five years and express an interest in a First Homes property, any rules surrounding locality should not apply.
How to apply for the First Homes scheme
With the First Homes scheme only new-build homes are eligible, so you’ll need to keep an eye on housing developments in your local area. Not all developments will include First Homes properties, but find one that does, and you’ll need to approach the builder if you want to apply.
The builder will check your eligibility for the scheme, and will usually help you complete the forms required by the local authority. There is no deadline for applying for the scheme, but there will need to be a plot available for you to reserve.
» MORE: Learn more about buying a home
Getting a mortgage
Securing a mortgage for at least 50% of the discounted price of the property is a prerequisite to being eligible for First Homes.
To ensure suitable mortgages are available, a number of lenders, mainly building societies, have committed to providing 95% loan-to-value mortgages for First Homes in support of the scheme.
» COMPARE: 95% LTV mortgages
What if I want to sell my First Homes property?
You’re free to sell your First Homes home at any time, but will need to try and sell to another first-time buyer who is using the First Homes scheme.
Your property will be independently valued, and the discount that you secured when buying will be applied to the new valuation to establish the price a new buyer must pay (the price caps don’t apply when re-selling).
So if you’ve bought a First Homes property with a market value of £300,000 at a 30% discount for £210,000, and the market value is £400,000 when you want to sell, the same 30% discount must be applied to this to give a selling price of £280,000.
The exception is if your First Homes property has been on sale for six months and an eligible First Homes buyer has not been found. In this instance, you may be able to sell your property for the full value on the open market to any buyer, but will need to pay your local authority a sum equal to the discount that you secured when buying by way of compensation.
Pros and cons of the First Homes scheme
The First Homes scheme will be suitable for some aspiring homeowners and not for others. Here are the advantages and disadvantages of First Homes that should be considered before applying.
Pros of First Homes
- Could help you onto the property ladder in your local area where you have previously been priced out.
- If you’re a first-time buyer living locally, a key worker, or an armed forces worker or veteran, local authorities are encouraged to prioritise you for the scheme.
- You get a new home at a minimum 30% discount but own it in its entirety.
- Stamp duty is based on the discounted price, not the market value (the price cap means you should qualify for full first-time buyer stamp duty relief if you buy outside of London).
Cons of First Homes
- You will need to find a developer taking part in the First Homes scheme in your area.
- Competition for First Homes will be fierce. There were over 300,000 first-time buyers in 2020, but just 10,000 First Homes are promised each year from 2022 (only 1,500 are scheduled for delivery in 2021).
- The discount attached to First Homes and the price cap could limit your profit potential and hamper progress up the property ladder if you want to sell.
- If you can afford the discounted price without taking out a mortgage, you won’t be eligible.
- Eligibility criteria for qualifying as a local or key worker can vary between local authorities.
- You must try to sell to someone else using the First Homes scheme.
- The scheme is only available in England.
Alternatives to the First Homes scheme
First Homes is one of a number of government initiatives designed to help first-time buyers onto the property ladder, while there are other options that may be worth considering too.
Help to Buy mortgages
Save enough for a 5% deposit and with a Help to Buy mortgage the government will let you borrow 20% more so that you can get a mortgage at 75% LTV. In London, the loan can be for up to 40%, but regardless of where you buy, no interest is payable on the loan for five years.
» COMPARE: Help to Buy mortgages
Right to Buy mortgages
If you rent from a housing association or the council, and wish to swap paying rent for a mortgage, you may be able to purchase your current property at a discounted price using a Right to Buy mortgage. You must have lived in and paid rent on the home for at least three years to qualify.
» COMPARE: Right to Buy mortgages
Shared Ownership mortgages
By allowing you to buy a stake in a home, rather than all of it, a Shared Ownership mortgage can help if you’re struggling to afford to buy outright. You’ll have the option to increase the share that you own in the future, and could one day own it all, but rent must be paid on any part that isn’t yours.
» COMPARE: Shared Ownership mortgages
A Lifetime ISA, and the 25% bonus it adds to your savings, is worth considering when trying to raise a deposit for your first home. Up to £4,000 can be saved into these tax-free accounts each year until you hit age 50 (though you can only open a Lifetime ISA between the ages of 18 and 40). You will be charged 25% should you withdraw the money before reaching the age of 60 if it isn’t for the purposes of buying your first home. This charge will also not apply if you are terminally ill.
Gifted deposit mortgage
If a relative or friend wants to give you a deposit, a gifted deposit mortgage can help you realise your homeownership dreams. A lender will need reassurances that you’re not expected to pay the money back, but a letter from your gifter is usually sufficient as confirmation.
No deposit is required with a 100% mortgage, but you will need a family member or a close friend to support you in getting one. Because of the guarantees your relative or friend must provide in case you don’t meet your mortgage payments, these are also referred to as guarantor mortgages.
» COMPARE: 100% mortgages
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Tim draws on 20 years’ experience at Virgin Money, Moneyfacts and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more