Independent expert Ed Bowsher looks at how it could benefit you
If you want to buy a home and you only have a small deposit – say 5% of the property’s value – things have been pretty tough since the financial crisis a few years ago.
You’ve either had to pay a much higher interest rate than the market average, or it’s been impossible for you to get a mortgage at all.
The Government has launched the Help-to-buy programme to try and solve this problem.
As a result, it should be easier for people with smaller deposits to get a mortgage. At the same time, builders should be able to sell new properties more quickly while the Government no doubt hopes to win more support from voters.
How it works
Help-to-buy comprises two main schemes:
- Help-to-buy equity loans (also known as Help-to-buy 1)
- Help-to-buy mortgage guarantee (also known as Help-to-buy 2)
Help-to-buy equity loan
Let’s start with the equity loans. These are only available to people who are buying newly built homes. The Government will lend up to 20% of the purchase price. The buyer must provide a deposit of at least 5% and then get a conventional mortgage for the remaining 75%.
There is no fee to pay on the Government’s loan for the first five years. After that, you’ll have to pay an annual fee of 1.75% of the loan’s value – that fee will rise by retail price index (RPI) plus 1% each year. At the same time, you must make your monthly mortgage repayment.
You must repay the Government loan when the mortgage is paid off or the house is sold, whichever comes first.
The buyer is borrowing directly from the Government, and is responsible for paying off that loan.
In order to access an equity loan, the builder of your new property will need to be part of the Help to Buy scheme. They may be able to help you find a financial adviser who can help you with your application.
Alternatively, in England you can go through a HomeBuy agent to locate participating builders and developments – you can find your local agent through the Help to Buy website.
The scheme has been running in England since April 2013, Scotland since September 2013 and Wales since January 2014, and it runs until March 2016 in all countries.
Help-to-buy mortgage guarantee
The Help-to-buy mortgage guarantee scheme is for borrowers across the UK and is available for buyers of new and existing homes. Once again, the buyer needs a 5% deposit.
With this scheme, the Government isn’t lending any money to the borrower. Instead it’s providing a guarantee to the mortgage lender for up to 15% of the property’s value, meaning that credit-worthy customers who are struggling with a small deposit can more easily access a 95% mortgage.
So if the borrower defaults on the mortgage and attempts to recover the situation aren’t successful, the lender will try to get its money back by selling the house. But if the proceeds from the house sale don’t pay off the total loan, the Government is promising to pay back up to 15% of the loan to the lender.
The mortgage guarantee scheme was introduced in October 2013 and will expire in December 2016.
For both schemes there’s a limit of £600,000 per property in England and the minimum deposit is £5,000 – the borrowers can’t rent out their properties. It’s worth noting that some lenders may only offer the scheme for a lower maximum purchase price or may not offer the guarantee scheme for new builds, so it’s worth checking with the lender first. You can find out more about both schemes at the Help-to-Buy website.
The two Help to Buy schemes in summary:
- Find a Virgin Money mortgage
- Mortgage calculator and tools including a tool to help you find out how much you may be able to borrow, repayment and overpayment calculators and budget planner
- Mortgage help and guides including help on moving home, buy-to-let, remortgaging, and guides for existing customers and first-time buyers.