Could a 2.5% deposit help more first time buyers onto the property ladder?

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

The initiative, called Your First Home, is intended to make homeownership more accessible while supporting demand for newly built properties. However, important details including eligibility rules, regional price caps and the launch date are not expected to be confirmed until the next Budget.

Here’s what prospective buyers need to know so far.

How could the your first home scheme work?

Under the proposals, first time buyers would contribute a deposit worth at least 2.5% of the property’s purchase price. This would be combined with a government-backed equity loan covering up to 20% of the home’s value.

The buyer would then need a mortgage for the remaining amount.

For example, on a qualifying home priced at £250,000, the funding could potentially look like this:

• Buyer’s 2.5% deposit: £6,250

• Government equity loan of up to 20%: £50,000

• Remaining amount: £193,750

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

Unlike a standard loan for a fixed sum, an equity loan usually represents a percentage of the property’s value. This could mean the amount repayable rises or falls as the home’s value changes. Buyers should check the final terms carefully once they are published.

Who could use the scheme?

Your First Home is expected to be available exclusively to first time buyers purchasing a new build property from a participating developer.

The government also plans to introduce:

• Household income limits

• Local property price caps

• Requirements for participating developers to contribute towards the scheme’s cost

These thresholds could determine which buyers and properties qualify. Regional price caps may be particularly significant in areas such as London and the South East, where property prices are generally higher.

Full eligibility criteria are expected to be announced at the Budget.

What could the scheme mean for first time buyers?

Saving enough for a deposit remains one of the biggest obstacles facing many aspiring homeowners. Reducing the minimum deposit to 2.5% could shorten the time some buyers need to save and help make purchasing a home feel more achievable.

The proposed interest free period on the equity loan could also reduce initial monthly costs compared with borrowing more through a high loan to value mortgage.

However, a smaller deposit does not automatically make a purchase affordable. Mortgage lenders will still assess factors such as income, expenditure, existing debts and credit history. Buyers must also budget for the other costs of moving, which may include legal fees, surveys, mortgage charges, removals and ongoing maintenance.

Why have concerns been raised?

Although the announcement has been welcomed as a potential boost for first time buyers, some property experts have warned about possible unintended consequences.

Because the scheme would increase buyers’ spending power while being restricted to participating new build developments, critics argue that it could contribute to higher new build prices.

There have also been comparisons with the former Help to Buy equity loan scheme. Research published by really moving in 2019 suggested that first time buyers using Help to Buy paid more for new build homes than buyers who purchased new properties without the scheme.

This makes it especially important to compare a qualifying home with similar properties in the surrounding area - including both new build and existing homes. Buyers should consider the size, location, specification, service charges and likely resale appeal, rather than focusing solely on the smaller deposit.

What happens when the property is sold?

Another important consideration is the property’s future value.

A home bought as a qualifying new build will eventually be sold as a previously owned property, potentially without the same financial support being available to its next buyer. Its resale value will depend on the wider market, the local area, the condition of the home and demand at the time.

Buyers should also understand how and when the government’s equity share must be repaid. The final scheme rules are expected to explain what happens when an owner sells, remortgages or chooses to repay the loan early.

As with any property purchase, prices can rise or fall, and there is no guarantee that a buyer will recover the amount originally paid.

Should you wait for the scheme?

Your First Home may eventually provide another route into homeownership, but it is not yet open for applications and its full terms have not been confirmed.

If you are already considering a move, it may still be worth exploring the options currently available. Depending on your circumstances, these could include lower-deposit mortgages, shared ownership or purchasing a more affordable existing property.

Speaking to a qualified mortgage adviser can help you understand how much you may be able to borrow and which options could suit your circumstances. An adviser can also explain the potential costs and obligations associated with an equity loan once the government publishes the final details.

Start planning your first move

While the prospect of buying with a 2.5% deposit is likely to attract attention, the detail will determine how valuable the scheme is for individual buyers.

Before committing to any property, compare the wider market, consider your longer term plans and make sure you understand the complete cost of the purchase, not only the deposit.

Your Move can help you explore homes for sale in your chosen area and guide you through the buying process. 

Book a mortgage appointment today.

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

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