Does Help to Buy really help?
The government's Help to Buy scheme is a divisive topic, with the argument revolving around one burning question. Does it help or hinder first-time buyers? Almost 60,000 homes have been bought through the scheme over the past two years - more than two-thirds of them new-builds. So there are at least tens of thousands of households who appear to have seen very obvious benefits.
But critics argue the scheme has actually made it harder for would-be first-timers by contributing to higher house prices, while doing seemingly little to stimulate house building. According to the Nationwide house price index, the average UK home has risen
in value by more than 15% during the period.
And in 2014, only 18,760 new homes were built, which, despite representing an increase of 8% on the number completed in 2013, was significantly fewer than the 250,000 experts say are needed.
Research by Pricedout.org.uk, an organisation that represents the interests of private renters, also suggests Help to Buy has destroyed the aspirations of nine prospective homebuyers for every one person it has helped - again because of rising prices.
However, as the saying goes, statistics can be used to prove anything. And arguing the exact opposite to Pricedout, the Mortgage Advice Bureau says first-time buyers using the mortgage guarantee part of Help to Buy are actually £180 better off a year than when they were renting.
While the Tories are only ever positive in their critique of their flagship home scheme, in a bid to quash some of the concern about rising prices making it harder for people to save deposits George Osborne used his March Budget to announce plans to roll out the Help to Buy Isa.
Expected to become available from banks and building societies from the autumn, the accounts will effectively see the government top up first-time buyers' savings (for more on the Help to Buy Isa, see opposite page) so they can get on the ladder sooner.
If you're weighing up whether Help to Buy might be suitable for you, here's how it works.
Part 1: the equity loan
This is a five-year, interest-free equity loan for up to 20% of a property's value from the government for people buying new-build properties with a 5% deposit. It can only be used to buy a home worth up to £600,000 in England, £400,000 in Scotland or £300,000 in Wales.
The equity loan enables the buyer to benefit from lower mortgage rates as they only need to borrow 75% (property value minus 20% equity loan and 5% deposit) of the property value, instead of 95% (property value minus deposit).
At the end of the five years, the homeowner will start to be charged a fee of 1.75% of the equity loan, rising each year by the retail prices index measure of inflation plus 1%.
The equity loan must be repaid by the end of your mortgage term or when you sell it – whichever is first.
Because the equity loan is specifically for people wishing to buy new-build homes, you need to find a developer that is part of the scheme.You can find local developments at helptobuy.org.uk/equity-loan/find-helptobuy-agent, helptobuywales.co.uk and in the housing section of scotland.gov.uk.
The developer and/or an independent financial adviser will help you arrange a mortgage application with a lender – most of which don't deal with the public directly for the equity loan scheme.
Part 2: the mortgage guarantee
To encourage banks to lend more often to borrowers who can only afford to put down a small deposit on a property's value – which is risky for banks because more of their money is at stake – the government has agreed to guarantee part of the loan.
A buyer puts down a deposit of as little as 5% but the government then guarantees up to 15% of the property's value, giving the bank the same level of reassurance it would have had with a 20% deposit.
So there's no real difference for homebuyers under the mortgage guarantee scheme.Those with a 5% deposit will still have to get a mortgage for the remaining 95% of the property value and remain fully responsible for the repayments. But in the event that they become unable to do so, the government covers any losses the bank incurs – up to 15% of the initial purchase price.
Anyone wishing to buy a home – new-build or older – up to the value of £600,000 in the UK has to live in it as their main residence.The scheme cannot be used to buy second homes or buy-to-let investments. It cannot be used by individuals who own property abroad, either.
Those with county court judgments against them for more than £500 from three years prior to an application are also unable to apply for the scheme.
They're not always the best 95% loan-to-value deals on the market but they are usually competitive.
Part 3: the help to buy Isa
The accounts, which are expected to become available from around September, are still in the planning stage but here's what we know so far. The maximum an individual will initially be able to pay in to open the Isa will be £1,000. From the next month onwards, they will be able to make further deposits of up to £200 each time.
The government will reward an individual's saving habit by paying out a £50 bonus for every £200 saved. The minimum bonus the government will pay is set at £400, meaning the saver must have built up a balance of at least £1,600.This means the shortest time a saver's money can be locked away for is four months.
Meanwhile, the most the government will contribute is £3,000, which would require a £12,000 savings balance. And it would take four years and seven months to save that amount due to the maximum contributions permitted.
There is no maximum duration the account can be used for but the accounts themselves are only expected to be available to new customers for a period of four years.
The Help To Buy Isa top-up will only be paid by voucher from the government to the mortgage lender upon purchase of a first-time buyer's home.The accounts will be limited to one per person rather than one per home, so those buying together can both get a bonus. This should mean that those buying together where only one person is a first-time buyer should still benefit from the Isa top-up but this has yet to be confirmed.
Account openers must be at least 16 years old and buyers must be purchasing UK residential (not buy-to-let) properties worth up to £450,000 in London and up to £250,000 elsewhere. Buyers must also not have opened a cash Isa within the same tax year.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "The Help to Buy Isa is a great idea. It encourages people to save, which is a far better way of tackling the issue of high house prices than increasing loan-to-values.
"Getting a big enough deposit is a problem in London and the South East but less of an issue in the rest of the country. The Help to Buy scheme has been a roaring success; boosting it further with the Help to Buy Isa will really assist first- time buyers and give them more of a chance of making their dream of home ownership a reality."
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.