What is Help to Buy?
It is split into two parts. Part 1 is an equity loan for those buying a new-build home and Part 2 is a mortgage guarantee for loans up to 95% of a property's value.
By the end of April 2014, just over 27,000 homes had been bought through the scheme – around 24,500 through the equity loan, which was introduced in March 2013, and the rest though the mortgage guarantee, which came into effect this January.
Much has been written about whether Help to Buy has been a good thing for the property market. Undeniably it has helped first-time buyers get on to the first rung of property ladder. Some 88% of homes bought through the equity loan component of the scheme have been snapped up by first-timers, according government figures to the end of March.
That said, Help to Buy isn't solely behind increasing numbers of first-time buyers. Looking at the entire mortgage market, there was a 41% rise in the number of people buying their first home in the 12 months to February 2014, as banks and building societies continued to increase their lending to those with smaller deposits.
Critics of Help to Buy say that both parts of the scheme are fuelling rising house prices. But while the mortgage guarantee may have had some effect on prices in London and the South East where property is always in short supply, the same is not true across the rest of the UK.
The top five local authorities for Help to Buy completions are Leeds, Wiltshire, central Bedfordshire, Milton Keynes and Peterborough. Nationwide data shows that the annual price rise for the first three months of the year for each stood at between 5 and 12%, not dissimilar from the UK average at just over 9%.
But moving on from the rights and wrongs of the scheme, if you're looking into whether it could help 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, £250,000 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 - depending on which comes first.
How do you apply for Help to Buy equity loan mortgage?
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 across England at helptobuy.org.uk/equity-loan/find-helptobuy-agent. A list of developers participating in the Welsh scheme can be found in the FAQs section of the helptobuywales.co.uk website, and in the Scottish scheme in the housing section of the scotland.gov.uk website.
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.
The advantages of the scheme include lower monthly mortgage repayments because you are only borrowing 75% of the property value instead of 95% and only a small deposit is required.
On the other hand, the equity loan must be repaid as well as the mortgage and because buyers only need a small deposit they are vulnerable to falling property prices. New-build property often sells at a premium for being ‘new' – people like to move in to homes no-one else has ever lived in. So in a static property market where prices aren't rising, the resale price of a new-build property might diminish over time. In a falling market, resale prices might fall further so buyers who had to borrow 95% of their property's value are more at risk of negative equity (when a mortgage exceeds the value of the home it is secured on).
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 reassurance had the buyer put down 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.
Help to Buy mortgage guarantee rates available
|Aldermore||Two-year fix at 5.28%||N/A|
Two-year fix at 4.99%
Three-year fix at 4.99%
Five-year fix at 5.49%
Two-year fix at 4.79%
Five-year fix at 4.99%
|A £99 fee for the two-year deal applies|
Two-year fix at 5.19%*
Two-year fix at 5.59%*
*A £995 fee applies
Two-year fix at 4.99%
Five-year fix at 5.49%
Who can apply for the mortgage guarantee?
Anyone wishing to buy a home - new-build or older - up to the value of £600,000 in the UK to live in 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 application are also unable to apply for the scheme.
What lenders can I apply through?
Most high street banks are participating in the scheme and mortgage brokers are also able to access the schemes, too.
Are the rates competitive?
They're not always the best 95% loan-to-value deals on the market but they are usually competitive.
As the government guarantee applies to lenders rather than borrowers directly, there's not so much to weigh up.
The advantage of the scheme is that it has made more mortgages available to buyers with smaller deposits. The only disadvantage is that it has been criticised for contributing to rising house prices.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
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.