How does Help to Buy work?
Announcing Help to Buy in his recent Budget, the Chancellor George Osborne said the deposits now required for mortgages have put homeownership beyond the reach of those who can’t get help from their parents.
His Help to Buy solution has two parts.
First is the shared equity loan where the government will lend up to 20% of the cost of a new-build property to anyone who has raised a 5% deposit themselves. The loan is interest-free for five years and can be repaid at any time, or when the buyer sells the house.
With the government’s 20% and your 5%, you’ll get access to the more attractive mortgage rates afforded to those with a 25% deposit to put down.
This kind of help was previously only available to first-time buyers with family incomes below £60,000 under the NewBuy scheme, but Help to Buy will be available to anyone who wants to buy a new home, on any income.
The scheme only applies to properties worth less than £600,000, but the Chancellor says this covers more than 90% of all homes.
The second part of the government’s promise is its Mortgage Guarantee, which will be offered to anyone who wants to buy a home – existing or new-build – but can’t afford the deposit. It will be open to all homeowners, subject to the usual checks, and the same property value limit of £600,000 will apply.
The shared equity part of Help to Buy will kick off from next month (April) and will run for three years, with guarantees to support £130 billion worth of mortgages.
The mortgage guarantee aspect will launch in January 2014.
There's also been speculation that existing homeowners could use the Mortgage Guarantee to remortgage their current homes at lower rates. Although Help to Buy's small print says you can't use it to remortgage with your existing lender, it says nothing about remortgaging the same home with a new lender.
As the scheme is still in a consultation period, it’s too soon to say how many lenders will be signing up, though the Council of Mortgage Lenders expects take-up to be ‘wide’. And James Cotton of broker, London and Country, was also encouraging. He said: “The big lenders will always like to show that they are behind these schemes.”
Homeless charity Shelter and PricedOut – a campaign group for first-time buyers and owner-occupiers – however, are among those opposed to the scheme.
Shelter says the money would be better spent building more homes. Chief executive Campbell Robb said: “This Budget was a huge missed opportunity to build enough homes to make sure our children will have a stable and affordable place of their own. Helping a small number of first-time buyers today will do little to meet the aspirations of young families tomorrow.”
PricedOut spokesperson Duncan Stott said: “Pumping more money into a housing market with chronic under-supply has one sure-fire outcome: pushing up house prices. At best it may help a small number of new buyers, but it will mean housing becomes more expensive for all those that follow.”
So, will Help to Buy help me?
In theory, if the only thing currently stopping you from buying a house is raising the cash for the deposit, then your chances could be improved – but there may be other things to consider first.
Even if you have the 5% deposit ready to hand over, you’ll still have to pass the usual criteria for getting a mortgage – which means being armed with a good credit score.
Credit reference agency Equifax is urging anyone considering applying for a Help to Buy mortgage to check their credit profile is up to scratch first. Neil Munroe said: “We are urging homebuyers to review their credit history before they apply. Then at least they can spot any information that might need updating – such as being registered on the electoral roll – to put them in the best position to get a good deal.”
To get a copy of your credit report, visit out credit monitoring channel and compare deals.
What if the house I buy sells for less than I paid for it?
According to Land Registry, the average price of a house in England and Wales was £162,441 in January. If you took the Help to Buy route and put down a 5% deposit of £8,122, the government would make its 20% contribution of £32,488 – which you’d have to pay back.But what happens if the house you buy loses value over time?
James Cotton says that it’s likely that sellers will still have to pay back the 20% contribution, regardless of the property’s value – but that assumption may be disproven as the government releases more details on the scheme over time. One possibility could be that you’ll pay back 20% of the property’s value, rather than its sale price.
Is the £600,000 upper limit a bit high?
You’ll no doubt have noticed the Help to Buy scheme is available on properties worth up to £600,000. On a property of that value, you’d get a government contribution of £120,000 for your £30,000 deposit.
As James Cotton points out, however, with the shared equity part of Help to Buy only applicable to new-builds, it’s very unlikely we’ll see properties being bought for anywhere near this upper limit.
As for the Mortgage Guarantee component, where you can buy non-new-build homes up to the value of £600,000, James said that a £120,000 contribution from the government would tend to go against the idea of the scheme, but added that the government will have done its sums and have the money to back it.
I have a 5% deposit; do I have any other options?
It’s possible get a mortgage on a 5% deposit without taking the Help to Buy route, which means you won’t have to pay back the government’s 20% contribution.
Lloyds TSB’s Lend a Hand mortgage for example, is available to buyers with a 5% deposit who have a friend or family member willing to put up savings of a further 20% of the value of the property. You can read more about this and other schemes in Robert Adungo’s article New help for first-time buyers.
There’s also still a number of lenders – usually building societies – that are willing to lend to 95% of the property value direct, but you’ll pay for your independence with higher interest rates. Leeds Building Society for example, is offering a 95% five-year fixed rate priced at 6.23% with £999 in total fees – very high compared to the 4.19% offered by Lloyds, fixed over three years.
The upside is that there’s no government contribution to pay back, and you don’t need to find a friend or family member with enough cash to back your application.
If you need any more help and advice, contact our mortgage partner, London & Country, for free, independent advice on 0844 209 8725.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.