A 2.5% deposit and a 20% government loan: the first-time buyer scheme coming at the Budget
What happened
On 26 September 2026 the Ministry of Housing, Communities and Local Government announced a new scheme for first-time buyers in England. It is called Your First Home. It works as an equity loan. The buyer puts down a deposit of 2.5% of the price. The government provides a loan worth 20% of the value of the property. The buyer takes out a mortgage for the rest. The scheme applies to new-build homes bought from developers taking part. There will be an initial interest-free period on the government loan. There are limits. There will be caps on household income, and caps on property prices which vary by local area. Developers taking part will be required to contribute towards the cost of running the scheme. The government says buyers could save hundreds of pounds a month compared with a 95% mortgage, because borrowing 77.5% of the value of a home usually attracts a better interest rate than borrowing 95% of it. Crucially, this was an announcement of intent rather than an open scheme. Full details - the exact caps, the costs, how the interest works after the initial period, and when it opens - are due to be confirmed by the Chancellor at the Budget next month.
Why this matters
For most people trying to buy their first home, the obstacle is not the monthly payment. It is the deposit. Saving 10% of the price of a house while paying rent is, for a great many households, arithmetically close to impossible. Wages have not kept pace with house prices, and rent takes the money that would have become a deposit. This is the reason the average age of a first-time buyer has been rising for years. A 2.5% deposit changes that sum considerably. On a £200,000 new-build, 2.5% is £5,000 rather than £20,000. That is the difference between a few years of saving and a decade of it. The second effect is on the mortgage itself. Lenders price risk. Someone borrowing 95% of a property's value pays a noticeably higher rate than someone borrowing 77.5%, because the lender has less cushion if prices fall. That rate difference, across a 25 or 30 year mortgage, is worth a great deal more than it looks month to month. There is a third reason the government is interested, and it is honest about it: the scheme is designed to support new-build housing at a time when construction costs have risen sharply. Restricting the scheme to new builds from participating developers is not incidental. It is part of the point. Which also means it is worth knowing what it does not do. It does not help you buy an older house, a flat above a shop, or a place from a private seller.
What the evidence actually says
The most important thing to understand about an equity loan is what the 20% actually is. It is a loan worth 20% of the value of the property - not a fixed sum of money. When you come to sell or repay, you typically repay 20% of what the home is worth then, not 20% of what it was worth when you bought it. If the property rises in value, the amount you owe rises with it. If it falls, the amount you owe falls too. This is how the previous Help to Buy equity loan scheme worked, and it is the part that surprised some buyers years later. It is not a trick - it is the trade-off for getting in with a small deposit - but it should be understood before signing, not afterwards. The 'interest-free period' is also worth reading carefully. Interest-free is not payment-free forever. On previous schemes of this type, interest began after several years and then increased over time. The detail of what happens after the initial period here has not yet been published. There is a wider debate among housing economists about whether schemes that increase buyers' purchasing power push prices up, particularly on new builds, which can already carry a premium over comparable older homes. That debate is genuine and unresolved, and anyone buying a new build should look hard at what similar older properties nearby sell for. Finally, and most simply: this scheme does not exist yet. Nothing can be applied for. The Budget next month is when the real numbers arrive.
Practical advice
If you are a would-be first-time buyer, here is what is worth doing between now and the Budget. Do not change your plans yet. There is no scheme to apply to, no list of participating developers, and no confirmed income or price caps. Making decisions now on the basis of an announcement is premature. Do keep saving. A 2.5% deposit is the minimum, not the target. You will still need money for legal fees, searches, surveys, moving costs and, above a certain price, stamp duty. Having more than the minimum also gives you options if the caps in your area do not work for you. Do check your credit record now, free, through one of the main credit reference agencies. Errors take time to fix and a mortgage application is a bad time to discover one. Do speak to a mortgage broker or lender about what you could borrow on your income. That number, rather than the deposit, may turn out to be the real limit. When the detail lands, the questions to ask are: what is the income cap in my area, what is the property price cap, what happens to the government loan when the interest-free period ends, how is the 20% calculated when I repay, and what happens if I want to move. Get free, independent guidance rather than relying on a developer's sales office. MoneyHelper, the government-backed service, gives free impartial help on mortgages and home buying and has no product to sell you.
What to know
The government has announced Your First Home, an equity loan scheme for first-time buyers in England. Buyers put down 2.5%, the government lends 20% of the property's value, and the buyer mortgages the rest - which should mean a better mortgage rate and potential savings of hundreds of pounds a month against a 95% mortgage. It applies only to new-build homes from participating developers, and there will be caps on household income and on property prices by area. The key point of caution is how equity loans work: you usually repay a percentage of the property's future value, not the pounds you borrowed. And the interest-free period is initial, not permanent. Full details, costs and timings come at the Budget next month. Until then, nothing to apply for - but a good moment to check your credit record and keep saving. Sources: GOV.UK (Ministry of Housing, Communities and Local Government), 'New first-time buyer scheme to be confirmed at Budget', 26 September 2026, https://www.gov.uk/government/news/new-first-time-buyer-scheme-to-be-confirmed-at-budget; MoneyHelper, 'Buying a home', https://www.moneyhelper.org.uk/en/homes/buying-a-home. This article is for general information and does not replace advice from a doctor, pharmacist or other qualified healthcare professional.
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