Here, we take a look at how the scheme works, who is eligible, as well as some of the mortgage costs that have just been unveiled by participating lenders.
What is Help to Buy?
Help to Buy is a two-part Government scheme designed to help first-time buyers and homemovers who can’t afford to move from the property they are in.
The first part of Help to Buy, which was introduced in April this year, is a shared equity scheme. It enables buyers with a 5% deposit to take out a government loan for up to 20% of the property price, effectively giving them a deposit of 25%. The buyer must then take out a mortgage from a lender participating in the scheme to cover the remaining cost.
The government loan is interest-free for the first five years, and after that there is an annual charge of 1.75% of the loan amount, which increases annually by the retail price index (RPI) measure of inflation plus another 1%. Homebuyers can repay all or some of the loan whenever they want, but repayments must be a minimum of 10% of the home’s market value. The loan has to be fully repaid when the property is sold or the mortgage ends.
The shared equity part of Help to Buy only applies to new-build homes worth £600,000 or less.
Banks which are participating in the first part of the scheme are RBS/NatWest, Halifax, Woolwich, and Santander. Several building societies have also signed up. These are Nationwide, Cumberland, Teachers, Dudley, Newbury, Chorley and Leeds.
The second part of Help to Buy, which comes into effect from today, is a mortgage guarantee scheme.
Under this part of the scheme, buyers will need to put down a minimum 5% deposit, but the Government then provides a guarantee to the lender for up to a further 15%. This reduces risk for the banks, as if the property ends up having to be repossessed, lenders will only face losses of 5%, with the Government reimbursing them the remainder. The guarantee only lasts for seven years, and lender can charge any interest rates they like.
In return for the guarantee, lenders will have to pay the government a fee of up to 0.9% of the mortgage value to cover any potential taxpayer losses if borrowers aren’t able to keep up with the scheme.
This part of the scheme applies to both existing homes and new-build properties, again up to a maximum value of £600,000.
Which lenders have signed up to the second part of the scheme?
Halifax and Bank of Scotland, Lloyds Bank, and TSB (all part of the Lloyds Banking Group), RBS, NatWest, Virgin Money, Aldermore, Santander and HSBC – have said they will participate in the mortgage guarantee part of the scheme, though only a couple of these lenders have unveiled details of some the rates they will be offering.
RBS and NatWest, for example, has said they will offer a two-year fixed rate for those buying under the mortgage guarantee part of the scheme at 4.99%, with no fee. Halifax meanwhile, has said it will offer a two-year fixed rate deal at 5.19% with a £995 fee.
David Hollingworth, of London & Country Mortgages said: “The few rates launched so far also look to be pitched below the few deals already in the marketplace for those with 5% deposit.
“For example, Newcastle Building Society offers a two- year fix outside the Help to Buy Scheme at 5.95% for people with a 5% deposit with a £195 fee. NatWest has undercut that substantially and managed to break below the 5% barrier with its Help to Buy two-year fix at 4.99% with no fee.
“Halifax will be priced a little higher at 5.19% on a two-year fix with a £995. Of course, the hope is that the more lenders that sign up to the scheme the greater the level of choice and competition will be.”
But, from Friday 11 October, even though the banks have not joined the Help to Buy scheme, Yorkshire and Clydsedale will be pegging down the cost of their existing 95% mortgages from 5.49% to 4.99% fixed for three years, for no arrangement fee.
Is Help to Buy always the best option?
First-time buyers and homemovers considering Help to Buy should remember that, although the scheme can help if you can get together a 5% deposit, if you are able to muster 10% or more, you may be able to find a better deal outside the scheme, according to Mr Hollingworth.
He said: “If you can stretch to 10% you could be offered better rates and lender options. For example Skipton Building Society offers a two-year fixed rate priced at 3.99% with no fee. This is 1% cheaper than NatWest’s 4.99% equivalent deal for the same deposit.”
He added that much will depend on how long potential buyers feel it will take to save the deposit. “Those that feel they are saving hard but only standing still in terms of deposit as a proportion of purchase price, will find the ability to accelerate their step up on the ladder an attractive one.”
If you are considering signing up for Help to Buy, remember that there are lots of other costs to factor in. You also need to think about Stamp Duty, mortgage and valuation costs, legal fees and surveys – which are likely to end up adding thousands extra onto the initial deposit.
Please note: Any rates or deals mentioned in this article were available at the time of writing.