Part one: Equity Loan
The first part of Help to Buy mortgage, launched on April 1, 2013 and available until 2020, is an Equity Loan scheme. It is open to both first-timer buyers and homemovers – but is restricted to new-build homes.
Under this part of the scheme, the buyer is only required to raise 5% of the property value as a deposit. The government will stump up a further loan of up to 20% through the Homes and Communities Agency (HCA). With a combined deposit of up to 25%, you will then have access to more attractive mortgage rates from lenders participating in the scheme.
But it's the cost of the government's 20% slice of the loan that's really competitively-priced. For the first five years, it’s interest-free. In year six, you will be charged 1.75% which will climb at a rate of 1% of that figure plus any increase in inflation (as measured by the Retail Prices Index (RPI)), every year thereafter.
Borrowers can choose to repay the equity loan at any time, without penalty. You can pay back either 10% or 20% of the total amount, so long as the loan is worth at least 10% of the value of your home.
If you don't repay the equity loan while you are still living 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.
The Equity Loan part of Help to Buy only applies to properties worth up to £600,000. Unlike previous schemes, there is no maximum income requirement, but the property must be a new-build home. The property purchased must also be your only residence. You cannot use Help to Buy to purchase a buy-to-let property.
As always, you will need to prove you can meet the mortgage lender’s criteria, which means you should be able to cover the monthly repayments, and your credit score will have to be up to scratch.
If you are interested in this part of Help to Buy, you will need to start by contacting a Help to Buy agent in the relevant area, as they rather than lenders administer the scheme. Visit the government's Help to Buy one-stop-shop and click on the map. And here’s a list of participating lenders.
Chorley Building Society
Cumbria Building Society
Leeds Building Society
Newbury Building Society
Teachers Building Society
Part two: Mortgage Guarantee
The Mortgage Guarantee element of Help to Buy is designed to give first-time buyers and homemovers with a small deposit a better chance of getting a mortgage. The Mortgage Guarantee scheme was originally scheduled for launch in January 2014, but the government brought the date forward and it was officially unveiled on October 8, 2013. It is scheduled to end on December 31, 2016.
Unlike the Equity Loan part of Help to Buy, the Mortgage Guarantee element applies to both new-build and existing homes. The maximum purchase price of £600,000 is the same.
Under the scheme, buyers will only need to raise 5% of the property value, while the government will then provide a guarantee for a further 15%.
Under the scheme, buyers will only need to raise 5% of the property value, while the government will then provide a guarantee to the mortgage lender for up to a further 15%. This gives banks and building societies the peace of mind to lend larger mortgages and, hopefully, at lower rates than would otherwise be attached them.
The Mortgage Guarantee scheme is a ‘behind-the-scenes’ arrangement between the lender and the government. While you will have to sign a declaration, it will not make any difference that your 95% mortgage falls under the Mortgage Guarantee scheme.
You won't be able to apply for the scheme if the property will be your second home or if you're planning on renting out the one you are buying. And the Mortgage Guarantee cannot be used in conjunction with any other scheme such as Shared Ownership.
When you apply for a mortgage under the Help to Buy guarantee scheme, you will be subject to the same checks as you 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.
Here is a list of participating lenders. You can find out what deal each is offering under Mortgage Guarantee by clicking on the name:
Al Rayan Bank (formerly known as Islamic Bank of Britain)