HELP TO BUY SCHEMES
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
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. This give buyers access to cheaper mortgage rates from lenders taking part in the scheme.
Q. Who is eligible and for what type of property?
It is open to first-time buyers and home movers but is restricted to new build. There is no salary or joint income cap and you will need a deposit of five per cent or more as well as a good credit history. There is a maximum purchase price of £600,000. The property purchased must be your only home. The scheme is not available for people who want to buy-to-let.
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 is available until 2020 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.
PART TWO - HELP TO BUY MORTGAGE GUARANTEE
The mortgage guarantee part of the Help to Buy scheme, available for new-build and second-hand properties, closed at the end of 2016. Under this part of the scheme, government took on some of the risk if the borrower defaults or the property is repossessed. It was designed to help those who could only afford a five per cent deposit. However, it was discontinued as 95 per cent mortgages became more widely available again from lenders.