Help to Buy is a government scheme which was launched in April 2013 to help first time buyers buy property without having to worry about the huge deposits that lenders usually demand. There are two ways to buy under the scheme.
1. Help to Buy equity loans
If you’re an individual looking to buy a new build home of up to £600,000, and can finance at least 5% of the purchase price, the government will provide you a loan of up to 20% of the price. The rest of the amount, i.e. 75% of the property price, will be financed as usual through mortgage. The home must be bought from a registered Help to Buy builder.
The government does not charge any interest on the loan for the first five years. From the sixth year onwards, a fee of 1.75% of the loan value must be paid. The fee increases every year to reflect the Retail Prices Index plus 1%. Fee paid from the sixth year onwards does not count towards paying the equity back. The loan amount must be paid in full either when you sell the property or on the day that the mortgage comes to an end. The amount to be paid back is 20% of the sale price, which may actually be more than the original loan amount if the property increases in value. As long as the loan is worth at least 10% of the market value of your home, you may also make early repayments of 10% or 20% of the total amount.
2. Help to Buy mortgage guarantees
Mortgage guarantee was introduced during the second phase of the scheme in October 2013. The scheme now extends to include any property up to £600,000 in value. All you need to do is put down 5% of the home value as deposit and you will get 95% mortgage to buy a home under the scheme.
As far as the buyer is concerned, there isn’t much difference at least as far as the initial deposit amount is concerned. The government offers a guarantee of repayment of 15% of the mortgage amount to the lender, to lower the lender’s risk so they can give you a higher mortgage. The participating lenders and the government deal with the paperwork behind the scenes, so there is no additional paperwork or fee for the buyer. The scheme is available on new build and previously owned properties to both first-time buyers and movers.
These are indeed exciting times for those looking to get their foot on the property ladder. Take advantage of the scheme while you can.
Photo courtesy: Shaun Dunmall