An expert has given his take on the scheme in the capital (Image: Richard Newstead via Getty Images)
London first-time buyers drawn to Labour’s Your First Home’s 2.5% deposit could still require close to £39,000 upfront to purchase a property at the scheme’s inner-London price ceiling, a mortgage broker has cautioned. Stephen Perkins, managing director of Yellow Brick Mortgages, warned that Stamp Duty, sizeable mortgages and restricted choice could render the scheme less attainable than its modest deposit implies.
Your First Home offers eligible buyers a 20% Government equity loan, interest-free for five years, towards a new-build property. With a minimum 2.5% deposit, buyers would need a mortgage covering the remaining 77.5%.
London Your First Home scheme numbers
However, Mr Perkins questioned whether the scheme would genuinely assist Londoners in purchasing homes suited to their long-term requirements. A buyer acquiring a property at the £650,000 inner-London cap would require a £16,250 deposit, alongside £22,500 in Stamp Duty.
That amounts to £38,750 before legal fees, mortgage charges or removal costs. First-time buyer Stamp Duty relief vanishes entirely once a property exceeds £500,000.
Stephen Perkins (Image: Newspage)
Mr Perkins said: “A 2.5% deposit sounds transformational until the buyer discovers they may need more cash for Stamp Duty than for the deposit itself. If much of the realistic new-build stock in inner London sits above the £500,000 Stamp Duty threshold, the scheme removes one very large upfront hurdle and immediately replaces it with another. A buyer looking at a £650,000 home would still need nearly £39,000 just for the deposit and Stamp Duty before any of the other costs of buying.”
Purchasing at the inner-London ceiling would leave a £503,750 mortgage following the minimum deposit and equity loan. At 4.5 times income, that suggests household earnings of approximately £112,000, before factoring in childcare, debts and other financial obligations. Yet the scheme’s London household income ceiling is £140,000.
Sweet spot
Mr Perkins continued: “That creates a strange sweet spot. You need a very healthy household income to afford a property anywhere near the London cap, but earn more than £140,000 and you cannot use the scheme at all. At the upper end, it risks becoming a scheme aimed at quite a narrow band of well-paid professionals.”
The obligation to buy a new-build within the price limits could restrict the choices for purchasers seeking a family house. Someone opting for a smaller flat may need to relocate again within a few years.
Transaction costs for buying and selling, alongside any erosion of the premium paid for a brand-new property, could then diminish their limited equity.
‘Scrutiny needed’
Mr Perkins said: “This is where I think the scheme needs much more scrutiny. If the homes that fit the price caps are mainly small starter flats, they may also be the homes young couples are most likely to need to leave once they start a family. Buying a new-build at a premium with a 2.5% deposit and then needing to sell it two or three years later could be an expensive way to discover that getting onto the ladder and moving up it are two very different things.”
Prospective purchasers ought to carefully consider the total initial costs, ongoing fees and how well the property will serve their requirements over time. Flats can attract service charges, while the equity loan begins accruing interest after five years.
Mr Perkins said: “If someone buys a suitable home and stays there for many years, the scheme could work extremely well. My concern is the buyer who can only find a small flat within the cap, outgrows it quickly and then discovers they have paid a new-build premium, have limited equity and face another set of moving costs.”