There are two strands to the Government’s Help to Buy scheme, Equity Loan and Mortgage Guarantee. Both are designed to help people to get on the property ladder, even if they only have access to a limited lump sum for a deposit.
The Equity loan scheme was released in April 2013 and applies to new build properties only. It is available to first-time buyers but also to those who are already homeowners and looking to move. The value of the house or apartment must be less than £600,000. While this may seem counter-intuitive it does help the housing market by enabling developers to sell properties of varying sizes and keep the housing market moving.
Buyers are required to raise 5% of the total capital as a deposit, the Government then subsidises up to 20% of the value as a further deposit on top of that raised by the buyer. This means that the buyer has access to a deposit of 25%, which in turn allows them to access better mortgage rates.
The really good part about the deal is the cost of the money that come s from the government. It is provided interest free for the first five years. The following year interest will be charged at 1.7% rising by a further 1% of that amount each year plus inflation every year after that.
Borrowers can repay the loan at any time, without penalty. The idea of this is to encourage buyers to pay off the initial loan and put the money back in the pot for the next wave of buyers.
One cautionary note about the scheme is that if you do not repay the government’s part of the loan before you come to sell the property, then the government retains a percentage stake in the property, equal to the amount of loan outstanding. This is calculated at the current market value of the house
You buy a property for £100,000
You raise £5000 as a deposit
The government pays a 20% deposit of £20,000
You pay nothing back to the government and
Five years later you sell the house for £120,000
he government reclaims £24,000
Obviously if the house were to double in value, then the 20% stake doubles to, so £20,000 becomes £40,000
Not all lenders are participating in the equity scheme but you can find out more about participating Help to Buy lenders here.
This is the second phase of Help to Buy, and it came into effect in October 2013. Buyers will still need to raise 5% of the mortgage value as a deposit. The government then guarantee a further 15% of the value to bring the total deposit up to 20%.
This is designed to give mortgage lenders the confidence to lend money to buyers who would otherwise only have a very small deposit. Apart from Natwest, Halifax and HSBC, most lenders are yet to release their rates for these Help to Buy Mortgages, and are not likely to publish details until early in the New Year.
The major difference for this scheme rather than the equity one above is that this arrangement is available for existing properties and is not restricted to new build. There is still a maximum price ceiling of £6000,000, and you cannot use it for a new home, under a shared ownership scheme or to get yourself an investment property.
The administration of the scheme will be very easy for buyers. Although you will have to sign some paperwork in relation to the scheme, most of the mechanics are dealt with by the lender and the government between themselves.
Anyone wishing to apply for either of these schemes will be subject to the same credit checks as they would with any other mortgage application. So you will have to prove you can afford the repayments and have an acceptable credit record.
Other useful sites include the Governments site: https://www.gov.uk/affordable-home-ownership-schemes
Rightmove also have some really useful information: http://www.rightmove.co.uk/help-to-buy.html