The Government launched the Help to Buy scheme in April 2013 to help people struggling to get on the property ladder as well as home owners with not much equity who want to step up. The initiative makes it possible to purchase a property priced up to £600,000 with as little as a five per cent deposit. The government will then step in to boost this either with a loan or a mortgage guarantee.
PART ONE - HELP TO BUY EQUITY LOAN
The equity loan part of the scheme applies to new homes only. Under this part of the scheme, if the buyer has at least a five per cent deposit, the government will offer an interest free loan of up to 20 per cent of the value of a property.
This means that borrowers only need a mortgage of 75 per cent to cover the remaining cost of their chosen property.
Q. Who is eligible and for what type of property?
It is open to first-time buyers and existing home-owners. There is no salary or joint income cap applied. But you will need a deposit of five per cent or more and a good credit history. There is also a maximum purchase price of £600,000.
Q. How does it work?
The government equity loan is interest free for the first five years which could make mortgage repayments lower. After that, borrowers are charged a fee, which starts at 1.75 per cent of the loan plus 1 per cent.
If borrowers repay the equity loan within five years – which is highly recommended – there won’t have to pay any fees. The equity loan can also be paid off early in lump sums.
The equity loan has to be repaid when the property is sold or the mortgage term finishes – whichever happens first. Borrowers will need to repay the market value of the 20 per cent loan at the time rather than the sum borrowed. This means it could be a larger amount if prices rise or less if they fall.
Q. For How long it is available?
The scheme will run for three years from April 2013 to April 2016. It is available from house builders registered to offer it.
Q. What are the pros and cons?
The scheme has been welcomed by the HomeOwners Alliance as making property ownership more affordable to those without a large deposit. However it is only available for new homes and there is a risk of negative equity. A new-build house is like a new car with an extra premium on the sale price which depreciates as soon as it is bought. Selling a new-build house after less than five years is likely to incur negative equity. Home buyers should consider if the property will meet their longer-term needs, for example if they start a family.
Q. Who will benefit most?
Those who will benefit most are those who can repay the 20 per cent equity loan within five years - avoiding the fees - and/or who will live in the property long enough to avoid negative equity.
Home buyers under this scheme cannot use an interest-free mortgage so they need to be able to afford a capital mortgage as well as the equity loan repayments.
It is highly recommended you contact an independent mortgage broker for advice on whether you should apply for this scheme. To find an independent financial advisor in your area see: localsurveyorsdirect.co.uk/mortgage-advice-broker.aspx
PART TWO - HELP TO BUY MORTGAGE GUARANTEE
The mortgage guarantee part of the Help to Buy scheme applies to both new-build and existing homes in the UK. Again buyers will need only a five per cent for the property value as a deposit but this time the government acts as guarantor. It offers lenders the option to purchase an insurance cover where a borrower has a deposit of between 5 per cent and 20 per cent which will compensate them for any loss if the borrower defaults or the property is repossessed. This support encourages lenders to increase the availability of high loan to value products, including 95 per cent mortgages.
Q Who is eligible and for what type of property?
It is open to first time buyers trying to get onto the housing ladder, and existing home owners moving up. They can purchase either new build or second-hand properties. There is no limit on your income. However it has to be your residential property, where you plan to live. You cannot let it out.
It is not available for buy-to-let landlords or second home owners or for a shared ownership purchase. It has to be your only property.
Q. How does it work?
A mortgage under Help to Buy works in exactly the same way as any other mortgage. The lender will check the buyer’s credit history to see if they have a history of payment difficulties and if they can afford the mortgage repayments.
The difference is the Government offers lenders the option to purchase a guarantee on mortgage loans. This means lenders taking part are able to offer home buyers more high-loan-to-value mortgages, typically between 80 and 95 per cent.
The buyer is still fully responsible for mortgage repayments. For example, if you have a five per cent loan, you will need a 95 per cent mortgage.
Q. For how long is it available
The scheme began in October 2013 and is set to run until January 2017.
Q. What are the pros and cons?
Unlike equity loans, it is open to purchasers of new build and second-hand – a major plus. The idea is that interest rates offered by participating lenders will be lower as the large mortgage loan is backed by a guarantee. However lenders are making 95 per cent mortgages more widely available again. It is worth checking if the standard 95 per cent mortgages that sit outside the scheme are better. Again, it is a good idea to talk to a mortgage advisor. To find one in your local area click here