Help to Buy
Help to Buy is a government scheme aimed at helping people with small deposits to buy a home or move up the property ladder. There are two main branches of Help to Buy – the Equity Loan and the Mortgage Guarantee.
Help to Buy Equity Loan
Under the Equity Loan part of Help to Buy, first-time buyers and home-movers only need to find a deposit of 5% of the property’s value. The Government will then provide an equity loan of a further 20%, meaning you’ll only need to qualify for a 75% mortgage.
Help to Buy Equity Loan is available in England until 2020 on new-build homes worth £600,000 or less.
Help to Buy London
Help to Buy London, which launched in February 2016, is an extension of the Equity Loan. Buyers will still need to raise a deposit of at least 5%. The only difference is that, due to higher house prices in the capital, the Government's equity loan doubles to 40% of the property's value, meaning you'll only need to qualify for a 55% mortgage.
Help to Buy London is available until 2021 across all London boroughs. Again, the scheme only applies to new-build homes worth £600,000 or less.
Help to Buy Mortgage Guarantee
The Mortgage Guarantee version of Help to Buy ended, as planned, on 31 December 2016. The scheme still required first-time buyers and home-movers to find a deposit of between 5% and 20% of the property's value.
But instead of a loan, the Government offered a guarantee to the mortgage lender of up to 15% of the property value. The idea was that, with the extra security, the rate charged on your mortgage would be lower. It also encouraged lenders to offer more mortgages to buyers with small deposits – the number of these deals increasing four-fold since its launch in 2013, according to figures.
The scheme was available on both new-build and existing homes worth £600,000 or less.
Help to Buy (Scotland)
From 1 March, 2016, Help to Buy (Scotland) Affordable New Build and Help to Buy (Scotland) Smaller Developers schemes are open to new applicants.
They both require first-time buyers and home-movers to raise a deposit of at least a 5% of the property value. The Scottish Government will then provide an equity loan of up to 15% meaning you'll only need to qualify for a mortgage of 80%.
Help to Buy Scotland is available until 2019 on new build homes in Scotland. The maximum qualifying property value is £230,000 in 2016/17, decreasing to £200,000 in 2017/18 and £175,000 in 2018/19.
Help to Buy (Wales)
On 10 December 2015, the Welsh Government announced a second phase of Help to Buy (Wales) when the first tranche of funding runs out in 2016. It says the second phase – which will operate under the same criteria as the first – will underpin the building of up to 600,000 new homes in the country.
Under the scheme, first-time buyers and home-movers will need to find a deposit of 5% of the property value. The Welsh Government will then provide an equity loan of a further 20%, meaning you’ll only need to qualify for a mortgage of 75%.
Help to Buy (Wales) phase two, will be available from 2016 until 2021 on new-build homes in Wales worth £300,000 or less.
Help to Buy ISA
The Help to Buy ISA, introduced on 1 December, 2015, is a tax-free savings account designed to give first-time buyers saving for a deposit a cash boost.
For every £200 saved into a Help to Buy ISA, the Government will throw in an additional £50. The maximum bonus you can receive is £3,000, which would apply to savings of £12,000. So if you are a first-time buyer saving for a deposit of up to £15,000, you’ll be able to reach your target faster.
You decide you're ready to get on the housing ladder.
You've found your dream home, and it costs £150,000. You've worked hard to save up for a deposit and have £7,500 put away, which equates to 5% the value of the property:
But until recently, this would not have been a big enough deposit to secure a mortgage. You'd have to continue saving until you'd amassed at least 10% of the value of the property – in this case £15,000.
Needing such a big deposit meant it just wasn't possible for many people to buy their own homes.
In order to overcome this problem, the Government introduced the ‘Help to Buy' scheme in October 2013. To qualify for the scheme you only need to save enough to cover 5% of the value of the property, rather than the 10% required for most mortgages.
There are two ways that the scheme can help you to buy your own home:
· By giving you an equity loan of up to the value of 20% of the property price
· By offering a guarantee to the lender so they can issue you with 95% mortgage
With an equity loan, the Government provide a loan of up to 20% of the price of the property, meaning you may be able to buy a home that you would ordinarily not be able to afford.
There are a couple of conditions to the Equity Loan that are important to be aware of. Firstly, because it's an equity loan, the government owns 20% of your property until you have paid the loan back. Secondly, after a 5-year interest-free period, the government will start charging you fees for the loan until you repay it.
Under the Mortgage Guarantee pathway, the government offers a guarantee to banks and building societies to support them in giving you a 95% mortgage. However, this doesn't mean that the government would help you repay your mortgage if you find yourself in financial difficulty. Your home will still be repossessed if you don't keep up with the payments on your mortgage.
Here is a brief outline of eligibility conditions for the Equity Loan and Mortgage Guarantee.
How do Equity Loans & Mortgage Guarantees compare?
We've illustrated how these two ‘Help to Buy' pathways compare below, with figures provided for a property valued at £150,000:
How do Equity Loans & Mortgage Guarantee repayments compare?
There are two major points to consider here: interest rates and repayment.
As far as the interest rates are concerned, the deals offered by lenders as part of Help to Buy scheme are typically offered at around 4.99% for fixed rates. Assuming the total duration of your mortgage is 25 years, here is what your repayments would amount to in the first 2 years:
As you can see, repayment amounts for the Equity Loan route are considerably lower, which is natural considering you're borrowing less.
However, you do have to bear in mind, that whilst you are repaying the money you've borrowed from the bank, the government still retains a 20% part of your home. Moreover, if your home grows in value, so would the share owned by the government:
Ultimately, this means that if you decide to sell your home at any point before repaying your Equity Loan, you will have to give repay the government 20% of the price you sell the home for, even if it's more than the original sum that you borrowed.
That said, it also works the other way round and if your home were to depreciate, so would the value of the share government holds in it:
In this instance, if you were to sell your home before you repaid your Equity Loan, you would pay the government back less than you originally borrowed.
Equity Loan Fees
Another thing to consider is the Equity Loan fees. These loans are offered interest free for the first five years, however in Year 6 of your mortgage you will be obligated to pay 1.75% of the original amount of your Equity Loan in fees. In each subsequent year this percentage will rise by the increase in Retail Price Index (a measure of inflation) plus 1 percentage point.
Assuming, for the sake of this explanation, that the Equity Loan fees are going to rise at the rate outlined above and the interest rates on the mortgage would remain at 4.99%, let's see how the rise in loan fees would affect your monthly expenses on repaying your mortgage:
Notice the loan fees kicking in from Year 5 to Year 6? The fees are predicted to be rising every year, cutting the difference in your repayments shorter and shorter with every passing year.
So, which one do I choose?
It really depends on your personal situation.
What kind of property are you looking to buy? Is it a new build, or a previously owned home? Remember, Equity Loans are only available on new build homes.
Also think about the property you're buying, is it a home for life, or something you plan to sell in a few years' time? If so, would you be ok with giving 20% of the sale price to the government?
Are you prepared to repay another loan in addition to your mortgage? Alternatively, if don't want to take our an equity loan, are you prepared to take on a 95% mortgage?
Also, don't forget about the other expenses associated with buying a home. These include legal fees, stamp duty, Land Registry fees and mortgage arrangement fees.
If you're buying a home for £150,000 you'd also need to pay:
- Up to £1000 in legal fees
- £1,500 in stamp duty
- £140 to Land Registry
- Plus you may also need to pay mortgage arrangement fees
Finally, do remember that even under the Help to Buy Scheme, failure to pay your mortgage and other loans secured on your property may result in your home being repossessed.
From all of us at Zoopla, best of luck on your property search!