Can Help to Buy help you?

Details of the second part of the government’s Help to Buy scheme, which will start rolling out from January 1, 2014, have now been unveiled. But don’t stop reading just because you are not a first-time buyer. Both parts of Help to Buy – unlike many like-minded previous schemes – are open to first-timers and homemovers alike.

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But can Help to Buy help you? We take a look at how both parts of the scheme work so you can make a valued judgement.

Mortgage Guarantee: Phase Two of Help to Buy

Starting with the most recent developments, the Chancellor, George Osborne, has now unveiled details of the second Mortgage Guarantee element of Help to Buy. It will mean that, from January next year, homeowners and first-time buyers will have a better chance of getting a mortgage when they only have a 5% deposit to put down.

This is because lenders that are nervous of offering these large loans will be able to call on the government to provide a guarantee that covers up to a further 15% of the mortgage. If the property is repossessed the government will reimburse any losses (but only of up to 20% of the original property price), while the lender will absorb a loss of 5%.

But the Mortgage Guarantee is a behind-the-scenes arrangement between the lender and the government. As a buyer, you won’t need to get involved and you may not even be informed your 95% mortgage falls under the scheme at all.

We will know more about how the Mortgage Guarantee will work in practice, as well as which lenders will be involved (so far only Lloyds TSB has openly signed up), nearer to the time of launch.

What’s certain now though is that the Mortgage Guarantee will apply to both new-build and existing homes up to a maximum purchase price of £600,000. You won’t be able to apply for the scheme if you already own a home or you’re planning on renting out the one you are buying. And the Mortgage Guarantee cannot be used in conjunction with any other publicly-funded property scheme, such as Shared Equity or Shared Ownership schemes.

Applicants will be subject to the same checks as they would with any other mortgage application which means your credit score will have to meet the lender’s requirements. You will also need to be able to prove that you can afford the mortgage repayments – so it’s worth remembering that the largest mortgages, such as 95%, come with the most expensive rates of interest.

You won’t be able to apply for a loan though the Mortgage Guarantee element of Help to Buy until January.

Shared Equity: Phase one of Help to Buy

The first part Help to Buy – which is a Shared Equity scheme – has been available since April 2013 when it was also announced. This part of the scheme is also open to both first-time buyers and homemovers, though crucially it is restricted to new-build homes.

Shared Equity Help to Buy still only requires the buyer to raise a deposit of 5% of the property value but the government will stump up a further 20%. The idea is, with a combined deposit of 25%, you will have access to more attractive mortgage rates.

But it’s the cost of the government’s 20% slice of the loan that’s really competitive. You won’t pay any interest at all for the first five years. In the sixth year, you will be charged a rate of 1.75% which will climb at a rate of 1% of that figure plus inflation (retail price index measure) every year thereafter. Borrowers can choose to repay the equity loan (which is interest-only) at any time, without penalty, but only in minimum chunks of 25%.

If you don’t repay the equity loan while you are in the property, when you come to sell it, the government will reclaim its 20% stake in your home at its current value. If house prices have gone up considerably, this could be a bitter pill to swallow.

Again, Shared Equity Help to Buy only applies to properties worth less than £600,000 but, unlike its previous scheme NewBuy, it doesn’t carry a minimum household income of £60,000. You will, as always, need to prove you can afford to service the mortgage repayments and your credit score will have to be up to scratch.

According to government figures, 7,000 people have already signed up to the Shared Equity part of Help to Buy. If you are interested, you will need to start by contacting a Help to Buy agent in the location in which you are looking to buy. Visit the government’s one-stop-shop here and click on the map. You'll find a list of participating lenders below.

Currently, Help to Buy is only available in England.

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Help to Buy Shared Equity: List of participating lenders

RBS and NatWest
Halifax
Woolwich
Nationwide Building Society
Santander
Cumberland Building Society
Teachers Building Society (restricted)
Dudley Building Society
Newbury Building Society
Chorley Building Society
Leeds Building Society

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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