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A PPA discount is a type of mortgage discount used by the UK government to help first-time buyers purchase a home. PPA stands for Price Purchase Agreement. It allows the buyer to purchase a property for a discount from the market value, making it more affordable. The scheme is open to qualifying first-time buyers looking to purchase a new build home.
What is a PPA Discount?
A PPA discount, also known as a home buy discount, is an equity loan scheme provided by the UK government through Homes England. Under this scheme, the government provides an interest-free equity loan which covers a percentage of the purchase price of a new build home. This effectively lowers the amount the buyer needs for a deposit.
For example, if a property is worth £300,000, and the PPA discount is 20%, the government would provide an equity loan for £60,000 (20% of £300,000). This means the buyer only needs a 5% deposit for the remaining £240,000 purchase price, rather than for the full £300,000.
The buyer repays the equity loan when they sell the property or at the end of the loan term. The loan term is usually 25 years for properties in London and 15 years for the rest of England.
Key Features of a PPA Discount
- Available to first-time buyers only
- For new build properties only
- Government provides an interest-free equity loan for 20%, 30%, 40% or 50% of the property price
- Lowers deposit amount required from the buyer
- Equity loan is repaid when the property is sold or at the end of the loan term
Benefits of a PPA Discount
A PPA discount offers several benefits that make homeownership more accessible and affordable for first-time buyers:
Lower Deposit Requirement
With a PPA discount, buyers only need a 5-10% deposit for the portion they are purchasing, rather than for the full 100% value. This significantly reduces the deposit amount needed upfront.
For example, with a 20% PPA discount on a £300,000 home, the buyer’s deposit requirement is reduced from £30,000 (10% of £300,000) to just £12,000 (5% of the £240,000 they are purchasing).
Improved Affordability
The reduced deposit amount also leads to improved mortgage affordability. Since the mortgage is taken out on the lower purchase price after the PPA discount, monthly repayments are lower.
This makes it possible for more first-time buyers to meet affordability criteria and qualify for a mortgage.
Access to Newer Homes
The PPA scheme is only available on new build homes. This allows buyers to purchase a brand new property which may better meet their needs compared to older homes in their price range.
New builds also tend to be more energy efficient and have lower maintenance costs.
Support with Staircasing
Staircasing allows buyers to gradually increase their share of the property by paying back some or all of the equity loan. This means over time they can own 100% of their home.
The PPA scheme supports staircasing in incremental steps, making this process simpler for buyers.
Eligibility Criteria for PPA Discount
To qualify for a PPA equity loan, buyers must meet certain eligibility criteria:
First-Time Buyer Status
The buyer must be a first-time buyer and not currently own any property. This is verified through a mortgage affordability assessment.
Citizenship and Residency
At least one buyer must be a British citizen or have indefinite leave to remain in the UK.
Property Price Limits
There are maximum property price thresholds in place in different regions of England. The property must be valued below these limits to qualify.
New Build Home
The property must be a new build home either for sale directly from the developer or through the local Help to Buy agent.
Main Residence
The buyer must intend to use the property as their only or main residence. It cannot be used as a buy-to-let investment property.
Mortgage Approval
The buyer must get an appropriate mortgage for their portion of the purchase price. Their income must be sufficient to meet affordability criteria.
How to Apply for a PPA Discount
Here is an overview of the process to apply for and obtain a PPA equity loan:
- Check if you meet eligibility criteria as a first-time buyer.
- Find a suitable new build property within your budget and the price limits.
- Apply for mortgage pre-approval so you know your budget.
- Reserve the property by paying a fee to the developer.
- Complete a PPA application with the local Help to Buy agent.
- The agent will verify your eligibility and process the application.
- Once approved, instruct a conveyancer to handle the legal paperwork.
- Your conveyancer will liaise with the developer’s solicitor.
- Obtain an offer of mortgage finance from a qualifying lender.
- Exchange contracts and arrange to complete the purchase.
The Help to Buy agent will guide you through each step of this process. Their service is free for buyers.
How Does Repayment Work?
With a PPA equity loan, repayment of the loan only happens when you:
- Sell the property, or
- Reach the end of the loan term – 15 or 25 years depending on location.
At either point, you must repay the equity loan percentage in full. This is paid back as a percentage of the property’s market value at that time.
For example, if you had a 20% PPA on a £300,000 property, the loan amount was £60,000. If you sell after 10 years for £350,000, you would repay 20% of £350,000, equaling £70,000.
The government does not charge any interest on the loan. The amount repaid is simply the percentage originally borrowed.
You can choose to repay part or all of the loan early through staircasing if you wish. Staircasing payments must be in minimum 10% increments of the market value at that time.
Advantages and Disadvantages of PPA
Advantages
- Lower deposit requirement makes buying more affordable
- Supports purchase of new build homes
- Staircasing allows you to increase ownership share
- No loan interest or monthly repayments
- Backed by the government, a trusted partner
Disadvantages
- Must repay equity percentage when selling – reduces sale proceeds
- Limits options to buy existing or resale homes
- Property value may grow slower than equity loan amount
- Requirements limit customization of new builds
Conclusion
A PPA discount can be an excellent option for first-time buyers to get on the property ladder, access low deposit mortgages, and purchase a new build home. The scheme makes homeownership achievable for more buyers.
However, the equity loan repayment requirements mean you do not benefit from full property price growth. Thorough financial planning is essential to determine if this scheme is the right fit.
Seeking professional mortgage and financial advice can help analyze the long-term impact and guide decision making. Carefully reviewing all aspects of a PPA to make an informed purchase decision.
| PPA Discount Percentage | Deposit Contribution Required |
|---|---|
| 20% | 5% |
| 30% | 5% |
| 40% | 10% |
| 50% | 10% |
This table summarizes the deposit contribution required from the buyer for different PPA discount percentages. As illustrated, the higher the PPA amount, the lower the buyer’s deposit requirement. But the buyer’s repayment amount is also higher.
