Mortgage guarantee scheme
Since the start of the pandemic in March 2020, the number of low-deposit mortgages available to buyers has decreased. The number of 95% mortgages available on the market fell from 391 to just three lenders due to the high risk involved. This new Mortgage Guarantee Scheme has been introduced to encourage banks and lenders to start offering 95% mortgages again because the Government will guarantee the portion of the mortgage over 80%. Basically, the government have promised to partially compensate the lender if a homeowner defaults on their mortgage.
This new scheme is set to begin in April 2021 and means that lenders are therefore more likely to reinstate their low deposit deals due to the government’s pledge. 95% mortgages are back on the cards with major lenders such as Barclays, HSBC, Lloyds Bank, NatWest and Santander and Virgin Money ready to offer these deals.
These 95% mortgage schemes mean a low deposit of 5% and are designed to stimulate growth in the first-time buyers’ market. The scheme will be available on new and existing properties priced up to £600,000 and will allow buyers to fix their initial mortgage rate for at least five years.
What you need to know:
- It will run from April 2021 until 31 December 2022 (it may be extended)
- It is open to first-time buyers and home movers across the UK.
- You will need to be buying a property to live in yourself – second homes and buy-to-let properties are not included.
- Both new-build and existing properties priced up to £600,000 are eligible.
- You will need to apply for a repayment (not interest-only) mortgage and pass standard affordability checks, including a loan-to-income test and credit score assessment.
- The mortgage you are applying for will need to be for between 91% and 95% of the value of the property you’re buying,
- Lenders will need to offer a five-year fixed-rate mortgage as part of their range.
For those already thinking about joining the property market it is important to note the changes about to happen in the market. 90% mortgages are already available on the market, but the rates are higher than they were before the pandemic. The introduction of more 95% mortgages will still be expensive but it may decrease the cost of the 90% mortgages. Only time will tell.
The attraction for first-time buyers is really the smaller deposit required to get on the property ladder. They have to remember though that it means they must borrow a larger amount at a minimum higher rate to get their foot in the door.
This deal is aimed at first-time buyers who as a generation prefer to stay flexible and not get tied down with a big mortgage. This is to encourage buyers to enter the market and as a result it can be a good time to take advantage of these schemes.
There are also some other schemes that already exist that can help you get on the property ladder. The Help to Buy scheme offers a 20% equity loan (40% in London) from the government on new-build properties in England. From April, it will be limited to first-time buyers and regional price caps will limit the cost of homes sold under the scheme.
A shared ownership scheme is also an alternative. This scheme involves purchasing a minimum stake of 25% and paying rent on the remaining 75%. Whilst this sounds affordable, the downside is that the monthly costs can be high.
There are also guarantor mortgages, which allow a parent or family member to help you buy a home. Guarantor mortgages usually involve the family member using their home or savings as collateral in case you default on your mortgage, but innovative products such as 'joint borrower sole proprietor' mortgages could be an alternative as well.
In our experience in London, the property prices generally don’t go downwards. Even in the 2008 crash, property prices were expected to crash but they froze instead followed by a boom in 2012-2016. If you are interested in getting on the property ladder, the main thing to note is is the property affordable for you right now? If you change your mind in the future, it is unlikely that you will lose your equity when you decide to sell. So, it is best to take advantage of these schemes whilst they are being offered.
Stamp Duty Holiday Extension
The Stamp duty cuts introduced in July 2020 have been a success! The property portal Zoopla says that at least 740,000 buyers will have benefited from the stamp duty cut by the time it ends.
Under the current rules, homebuyers in England and Northern Ireland don’t have to pay any tax on the first £500,000 of the property price, meaning many aren’t paying any stamp duty at all and those buying pricier homes are saving up to £15,000. This stamp duty holiday fuelled a huge recovery in the housing market and is now being extended until the end of June.
The new timeline:
- 0% stamp duty on the first £500,000 of property purchases until 30 June.
- 0% stamp duty on the first £250,000 until 31st
- 0% stamp duty level on the first £125,000 (the normal rate) from 1stOctober
The stamp duty holiday has resulted in a mini boom of both house prices and property purchases: house prices rose by 8.5% year-on-year in December according to the Land Registry, while HMRC figures show that transactions were up 24% compared with December 2019. Provisional figures show that 129,400 transactions went through in the UK in December – compared to 87,040 in 2019 and 83,880 in 2018. Meanwhile, data from Rightmove shows that the average number of days it took to sell a property fell to just 49 in November, compared to 67 a year earlier.
This stamp duty holiday extension has come after many had raised concerns that home purchases could collapse if the holiday ended abruptly this month. This will be a big relief to many buyers who had been racing to complete their transactions before the holiday ended.
The demand is certainly outstripping the supply of properties on the market. There are now fears that house prices are surging due to the rush of buyers trying to take advantage of the holiday. As discussed above, even after the stamp duty holiday ends we don’t see prices falling in London so taking advantage of schemes like this are great.
There has been definite movement in the market, but sales have fallen through as lenders have been hesitant. That is why in a bid to keep the market buoyant and offer support to first-time buyers, the Chancellor also announced the government-backed mortgage guarantee scheme which we covered above.
This stamp duty holiday will certainly help your money go further if you are thinking about moving home or as a property investor. The scheme is open to any buyer, not just first-time buyers and applies to any property up to the value of £600,000 from April 2021. If you were to buy a £500,000 property in England or Northern Ireland, you could still save up to £15,000 on stamp duty if you complete before 30 June. Even if you miss this new deadline, you can still save money due to the tapering period upto the end of September.
Based on the UK average house price of around £250,000, this could allow you to buy a home with a deposit of £12,500.
Capital Gains Tax allowance
The Capital Gains Tax-free allowance is currently £12,300 for individuals. This is the amount of ‘gain’ one can earn tax-free. In this Budget, the Chancellor was expected to increase the tax but instead announced that this tax-free allowance would be frozen until spring 2026.
Capital gains are taxed differently from income, and you have a separate personal allowance for capital gains (in addition to your personal allowance for income).
You need to have made a certain amount of profit on your items to be taxed on them. This amount depends on whether you are a basic-rate or higher-rate taxpayer, and what the current tax-free allowance is for the tax year.
What do you need to have pay Capital Gains Tax on?
Capital Gains Tax (CGT) is charged differently for business and non-business assets. Typical investments that you might have to pay capital gains on include:
- a second property or buy-to-let
- shares and funds, unless they're held in an Isa or pension
- the sale of a business valuables such as jewellery
- antiques and art
Business assets you may need to pay CGT on include:
- land and buildings
- fixtures and fittings
- plant and machinery, for example a digger
- registered trademarks
- your business’s reputation
You will need to work out your gain to find out whether you need to pay tax.
Capital gains tax on properties
If you sell a property in the UK, you may need to pay CGT on the profits you make. You generally won't need to pay the tax when selling your main home.
You will usually face a CGT bill if:
- selling a buy-to-let property
- selling a second home.
- if your home is partly used as a business premises
- if you lease out part of your property
If you sell a house more than you bought it for you might need to pay CGT on the difference. This only applies to second homes or rental properties. You can keep all the profits when selling your main home.
You’ll pay 18% capital gains tax if you’re a basic tax rate payer or 28% if you are a higher rate tax payer. You can make an annual profit of over £11,700 on your property before paying any tax. However, if you do not use this allowance before the end of the tax year it is gone forever. You can deduct buying and selling fees such as fees you pay to an agent and if you invest in home improvements this also counts against the increase too. If you don’t make a profit on the sales of your property, these losses can be knocked off your capital gains tax up to and including 4 years’ worth.
The capital gain tax allowance is linked to whether you are in the basic tax band or higher-rate tax band. These Income tax and National Insurance thresholds determine how much of your income is taxed.
Usually, the thresholds for tax rise with inflation but the Chancellor froze the thresholds until spring 2026 at which employees start paying 20% basic income tax and at which level, they pay the higher rate of 40%.
The personal allowance at which people start paying income tax will therefore rise from its current £12,500 to £12,570 from April 6 but will then be maintained at that level until April 2026, rather than rising with inflation. The higher-rate tax threshold will raise from the current £50,000 to £50,270 on April 6 and be held there until April 2026. So above a salary of £50,270, each additional pound of income is taxed at 40% and up to earnings of £150,000, the rate goes up to 45%.
Though this is not technically a tax rise, it does mean many will pay tax on more of their income than they would have if the thresholds had continued to rise over the next few years.
As a result, if you receive a pay rise before 2026, you could find yourself pushed into a new tax threshold – and paying more tax. These thresholds will rise to £12,570 for the 20% band and £50,270 for the 40% band in April as planned but will then remain at that level for five years, even if inflation helps to boost wages. This is something to bear in mind because the sale of a buy to let property can be included as a capital gain and can push you into a higher income tax bracket and therefore a higher CGT rate of 28%. There is a freeze for the next 5 years that is there to be taken advantage of when dealing with properties.
In this Budget, the chancellor has said the tax thresholds for the pensions lifetime allowance, inheritance tax and the annual exemption for capital gains tax would remain frozen until 2026.
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
There is normally no Inheritance Tax to pay if either:
- the value of your estate is below the £325,000 threshold
- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
For example, your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
Each individual has a tax-free allowance – the ‘nil-rate band’ – of £325,000. If they are giving away a property to a direct descendant there is an additional allowance called ‘the residence nil-rate band’. It is currently £175,000. The residence nil-rate band was due to rise with inflation in April 2021, but both thresholds have been frozen until 2026. It still means, however, that married couples and civil partners can give away up to £1m free of inheritance tax.
This means that if you inherit money or benefit from profits from your investments, the amount of money you can receive before you start paying tax will stay the same for five years, irrespective of inflation. Likewise, the amount of money you can build up in your pension pot before attracting a tax charge will remain unchanged until 2026.
If you have a savings plan, you may also want to adjust it to factor in newly announced freezes on inheritance tax thresholds, the pensions lifetime allowance and annual capital gains tax exemptions. These have all been frozen until 2026. In our opinion the threshold is still very low anyway and if we are talking about average property prices in London these are well above this threshold.
For more information on Inheritance tax see our our recording of our last inheritance tax seminar recorded on Facebook live - click here to learn more.
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