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Help to Buy

Help to Buy is a Government scheme which is aimed at helping people get onto, or move up, the housing ladder. It will help existing home owners and first time buyers purchase a home with as little as 5% deposit.

Help to Buy equity loan scheme started in April 2013 and will run for up to three years. The mortgage guarantee scheme launched in October 2013 will also run for three years.

There are two ways to purchase a property up to the value of £600,000 using Help to Buy:

  • Mortgage Guarantee - the Government agrees to cover part of your mortgage if you only have a small deposit, taking on the default risk should you fall behind with payments. The property can be new-build or pre-owned and located in England, Northern Ireland, Scotland and Wales.
  • Equity Loan  - the Government agrees to cover part of your mortgage if you only have a small deposit, taking on the default risk should you fall behind with payments. The property can be new-build or pre-owned and located in England, Northern Ireland, Scotland and Wales.

Fact:  In 1985, average first-time buyers needed a deposit of 5% to buy a home - in 2012, this had increased to 20% (HM Treasury)

Help to buy mortagage guarantee

How the scheme works:

The scheme works by offering lenders the option to purchase a guarantee from the Government on mortgages where a borrower has a deposit of between 5% and 20%.

The guarantee offers lenders an ‘indemnity’ or insurance cover, which will compensate them for most of any loss they may suffer if the borrower defaults, the property is repossessed and there is insufficient equity in the property to fully repay the lender.

This will encourage many lenders to increase the availability of high loan to value products, including ‘95%’ mortgages which have been very scarce in recent years. An increase in the number of lenders offering 95% schemes should also lead to a reduction in their cost due to greater competition to attract this business. The mortgages advanced by lenders using the Help to Buy scheme will be subject to the lenders’ usual underwriting criteria.

Example

If the home in the graphic above sold for £250,000, making a £50,000 ‘profit’, you’d get the entire £250,000, without having to pay back any government loan or share any profit. As you own the property fully, you receive the full benefit of any property appreciation with just your mortgage to repay as with any normal mortgage.

Who is eligible for Help to Buy Mortgage Guarantee?

  • Eligibility criteria for the scheme are detailed below:
  • Available to both existing home owners and first-time buyers
  • Buyers need a minimum of 5% deposit
  • Available on all previously owned and new build properties up to the value of £600,000
  • Must be the only property owned by the borrower
  • Available for properties in the UK
  • Borrowing from a participating mortgage lender

How long will the scheme be available?

The scheme has attracted a lot of attention and a number of lenders have already launched mortgage deals with others expected to follow. The scheme is set to run until January 2017 although the Bank of England will monitor its impact and could either make changes to the qualifying criteria or how long it will be available if they think it is necessary to do so.

Help to Buy Equity Loan

How the scheme works:

The scheme works by offering potential buyers a government backed equity loan up to the value of 20% of the purchase value of a new build property. The buyer must have at least 5% to put down as a deposit and meet the affordability criteria to receive the equity loan. A mortgage is required to cover the rest of the purchase – 75% of the value of the property if the full 20% equity loan is taken. A major benefit of this arrangement is that the rates of interest charged at 75% LTV are significantly better than those available at 95% so the monthly mortgage payment will be lower.

The equity loan is interest free for the first 5 years, but thereafter there will be a charge. In the 6th year, there will be a charge of 1.75% of the loan’s value. After this, the fee will increase every year in line with inflation. The annual increase in the fees is worked out by using the Retail Prices Index (RPI) plus 1%. The Help to Buy agent will contact the borrower before these charges start to arrange for payments to be made from a suitable bank account. A statement showing what is owed will also be sent each year.Some or all of the equity loan can be paid prior to this. You will, however, be required to repay the equity loan in full on either the sale of your property or when the mortgage term ends, whichever is the sooner.

On the sale of the property, the government is entitled to its money back. This is the value of the original equity loan plus a share of the growth in the value of the property equal to the percentage contribution it made initially.

This type of mortgage is known as a ‘shared equity’ mortgage.

Example

For a property worth £200,000

Amount

Percentage

Cash deposit

£10,000

5%

Equity loan

£40,000

20%

Your mortgage

£150,000

75%

If the home in the graphic above sold for £250,000, making a £50,000 ‘profit’, you’d get £200,000 (£150,000 from your mortgage, £10,000 cash deposit back and £40,000 as 80% share of the ‘profit’) and pay back £50,000 to the government (the £40,000 equity loan, plus an extra £10,000 as 20% share of the ‘profit’). You’d need to pay off your mortgage with your share of the money.

If you are thinking of applying for the Help to Buy mortgage guarantee scheme you will need to consider the following:-

Borrowers will need to have at least a 5% deposit.  You will also need additional funds to cover the costs of Stamp Duty, if applicable, and legal fees, valuation/survey and search costs etc.

Borrowers will need to pass affordability checks with mortgage lenders.  They need to know about your finances to ensure you’ll be able to meet the mortgage repayments if the interest rate rises.

Borrowers will need to declare that the property purchased is the only one owned by them.  They cannot have any interest in another property anywhere else in the world.

The Help to Buy scheme is not suitable if you intend to rent out the property you are proposing to buy.

The Help to Buy scheme is available in England.  There are alternative schemes available in Scotland and Wales.

In today's turbulent market it's hard to know which way to turn to find the right mortgage. That's why Andrew Grant has joined forces with L&C, the UK's leading no fee mortgage broker to offer you free advice about the best mortgage to suit you. L&C's advisers have extensive mortgage expertise and can help first time buyers, home movers, buy-to-let purchasers and those looking to remortgage. You can speak to one of our advisers now on 0800 073 1958.

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Andrew Grant Mortgage Service is provided by London & Country Mortgages Ltd. Beazer House, Lower Bristol Road, Bath, BA2 3BA who are authorised and regulated by the Financial Conduct Authority. Their FCA number is 143002

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