It can be difficult for first-time buyers to get onto the first rung of the ladder, particularly when mortgage lenders require a substantial deposit in order to take out their lowest-rate mortgages. Many borrowers have the necessary income to service a mortgage but don’t have the savings to put down enough upfront, and as they keep saving, they sometimes find that rising house prices mean the goalposts keep moving.
The government’s Help to Buy scheme has been designed to address this problem, making it easier for first-time buyers (and those who have owned a home before) to buy a property.
There are two different schemes – Help to Buy Equity Loan and Help to Buy Mortgage Guarantee. Here’s how they work.
The government lends you up to 20% of the cost of your home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest.
For example, if you wanted to buy a house for £200,000, the government could lend you up to £40,000, you put down a £10,000 deposit and the mortgage lender will offer you £150,000.
You won’t face charges or interest on the 20% government loan for the first five years, and after that interest is 1.75% rising every year by a rate linked to Retail Price Inflation plus 1%.
After 25 years or when you come to sell the property you will need to pay the government back its share of the property, which could be up to a maximum of 20%.
The equity loans are only available on specific newly built homes that are part of the Help to Buy scheme and are limited to properties costing up to £600,000. They are available to homemovers and previous homeowners as well as first-time buyers.
This scheme is only available in England and has recently been extended to run until 2020.
Mortgage Guarantee Scheme
Under the scheme the government offers lenders the option to purchase a guarantee on mortgage loans. This makes it easier for them to offer mortgages to borrowers with a low deposit.
The idea is that lenders taking part in the scheme make more loans available at 85% to 95% of the property’s value, and at reasonable prices, because they have a government guarantee that protects them against losing money.
That means that more borrowers without large deposits should be able to get a mortgage, without paying over the odds for it.
The ‘mortgage guarantee’ bit of the scheme is for the lender, and you will still be fully responsible for your mortgage repayments. So if you have a 5% deposit, you will need to take out and pay back a 95% mortgage.
A mortgage under the Mortgage Guarantee Scheme works like any other homeloan. Your lender will check that you can afford the mortgage now and if interest rates were to rise.
As long as you don’t already own a property (anywhere in the world) you can apply for a mortgage under the Help to Buy Mortgage Guarantee Scheme to purchase a new property, up to a maximum value of £600,000. It is currently planned to run up to 2016.
- The government will support people who have at least a 5% deposit to buy a home through a two-part scheme aimed at increasing the supply of low-deposit mortgages and new housing.
- Each part of the scheme will help you to purchase a home with a maximum value of £600,000.
Help to Buy: Mortgage Guarantee
- New-build and existing homes
- You’ll need a deposit of as little as 5% for this scheme
- Available to existing homeowners as well as first-time buyers
- You’ll need to secure a mortgage for your purchase. The government guarantee will encourage lenders to offer better access to low-deposit mortgages
- Maximum home purchase of £600,000
- New-build homes only
- Available to existing homeowners as well as first-time-buyers
- A minimum of 5% deposit is needed
- The government provides a loan of up to 20% of the value of the property
- A mortgage of up to 75% of the value of the property is needed to cover the rest
- The first five years of the loan are free of interest. In the sixth year interest becomes payable