Help to buy may no longer be headline news but it is providing valuable support to people buying a new home, up to 31st March 2016, or earlier if all the funding is taken up. In particular it can help first time buyers struggling with the challenge of finding enough savings to put down a respectable deposit. The scheme comes in two forms: equity loan and mortgage guarantee.
The equity loan scheme aims to bridge the gap between a small deposit and a mortgage for a smaller percentage of the purchase price. This scheme is available to those looking to move as well as first time buyers, but can only be used when purchasing new-build property from a home-builder registered with the scheme. Under current rules buyers are forbidden from using this scheme in combination with part-exchange on any existing property. Of course, there is absolutely nothing to stop buyers from selling their property separately and using the proceeds to (help to) fund the necessary deposit.
Buyers must be able to put down a minimum of 5% of the sales price (maximum £600,000) and the equity loan scheme will provide a minimum of 10% and a maximum 20% of the purchase price. This means that buyers only have to find a mortgage for 75% to 85% of the price paid. No loan fees are charged for the first five years of the loan. Following this interest is charged on a scale which rises annually in line with any increase in the Retail Price Index (RPI) plus 1%. The loan must be repaid within 25 years or when the home is sold. At that point the borrower has to pay the same percentage of the proceeds of the sale as the initial loan was of the original purchase price. In other words, if the borrower takes out the maximum 20% equity loan, the borrower pays 20% of the total market value on any future sale.
The mortgage-guarantee scheme is essentially a form of insurance available to lenders who provide mortgages for higher percentages of the value of the property. Unlike the equity loan scheme, the mortgage-guarantee scheme can be used to buy existing property (as opposed to just new-build property). Shared-ownership properties are, however, excluded from the scheme.
As with the equity loan scheme, the buyer needs a minimum deposit of 5%, but in the mortgage guarantee scheme the lender provides a mortgage for the remainder of the purchase price in the normal way. The lender can, however, purchase what is effectively an insurance policy from the government for up to 15% of the value of the property. This helps to reduce the risk of lending to buyers with smaller deposits.
The mortgage guarantee scheme is open to people who have owned property in the past. Borrowers must, however, have sold the property by the time they enter into the scheme, and must use a repayment mortgage, rather than an interest-only, offset or guarantor mortgage.
What It All Means in Practice
For many people, a house is the single biggest purchase they will ever make in their lives. It is therefore crucial to look carefully at all the available options to ensure that you get the best possible deal. It can also be hugely valuable to get some advice from a financial adviser, who can not only answer any questions you have about the house-buying process but also help to make sure that your finances in general are in as good a shape as they can be before you start applying for a mortgage.