What are Help to Buy Schemes?
The Help-to-Buy Scheme was launched at the beginning of October.
It aims to encourage people to make the leap onto the property ladder without having to save a large deposit. Many mortgage lenders previously required deposits of up to 20% of the property’s value.
The Scheme is split into two different types and joins the existing shared ownership and NewBuy schemes; The Help to Buy equity loans, and the Help to Buy mortgage guarantees.
How will it help?
Under the Scheme, Mortgage Lenders and Banks will now offer much more achievable mortgages of up to 95% of a property’s value, leaving previously struggling house hunters with just 5% deposits to save for.
Mortgage Guarantee - Help to Buy
Why haven’t Banks offered this until now?
Since the beginning of the recession, mortgage options have narrowed and large mortgages have been increasingly hard to come by.
This government funded scheme will work by having the percentage difference (up to 15%) guaranteed by the government. In return the Lender (the Bank) will pay a fee to secure this guarantee. It is important to note that this guarantee is not provided to you.
This makes lending more attractive to the Banks.
When does the Scheme start?
Mortgage Lenders are able to start offering these mortgages now, and the mortgages will be guaranteed from January 2014.
Who is eligible for the Scheme?
This scheme is not just for first-time buyers. It also covers movers with properties valued up to £600,000.
The property cannot be a shared ownership or shared equity purchase and properties purchased as a second home will not be eligible. Likewise, the scheme will not allow you to sub-let your home.
Unlike other schemes (including the equity loan scheme), the property does not need to be a new build property, just located within the UK.
Lenders and repayments
The government has teamed up with certain mortgage lenders, but not all.
You must first check your mortgage lender is participating in the scheme as not all are. You must also pass the usual affordability checks carried out by the mortgage lender.
Repayments of your mortgage must be made rather than just interest-only payments.
Equity Loan - Help to Buy
The equity loan option is similar in its end result; the purchaser need only provide a deposit of 5% of the property price. However there are a few differences to note.
Under this scheme, instead of guaranteeing a percentage with the Lender, the government will loan you up to 20% of the property price allowing the Lenders to offer 75% mortgages, and for you to get on the property ladder without a huge deposit.
A good example of this would be a property worth £200,000
Your mortgage lending would be £150,000
Your equity loan would be £40,000
Your cash deposit needed would be £10,000
When you come to sell, the sale proceeds will be split in the same proportions.
Who is eligible?
Unlike the guarantee scheme, the equity loan scheme is only available for new build properties up to a value of £600,000. Once again you will not be allowed to sub-let the property and cannot be a second home owner.
What will it cost me?
Initially this scheme will not charge you anything. However once you have been settled in your home for 6 years you will be required to pay a loan fee of 1.75% of the loan value, which will increase further each subsequent year. These fees will not count towards paying back the loan.
What happens when I want to sell or pay back the loan?
You can pay back your loan when you sell your home or even if you don’t sell providing the loan is worth at least 10% of the property’s value. You can then pay back either 10 or 20% of the total amount. Otherwise you will need to pay back the loan when your mortgage period comes to an end.
How popular will these schemes be?
Only time will tell, but they’ve been getting a lot of attention recently. Are you considering applying? Let us know your thoughts in the comments.