Help to Buy Scheme 1 & 2: The simple guide

Help To Buy Scheme

Help to buy scheme: A simple guide to the help to buy scheme 1 & 2 Equity Loan vs Mortgage Guarantee.

There was much debate when the 1st help to buy scheme (equity loan) was introduced in April 2013, as to whether this attempt by the government to try kick start the property market and help first buyers onto the property ladder would actually work.

By the end of 2013, nearly 13,000 homes were bought through the scheme and over 6000 more due to buy. Some 810 sales took place across 32 London boroughs which accounted for 6% of all property sales in the capital and 90% of new build sales through the scheme were first time buyers. Help to buy has clearly made a positive impact on the property market whilst boosting the construction industry, as planned.

With the launch of help to buy 2 (mortgage guarantee) in January 2014, it looks set to attract many more buyers to the property market as it is available to all home movers and for both new and pre-owned property, but you’ll still need good credit and eligibility will be subject to the usual lending criteria of the lenders which has tightened somewhat since 2008.

Due to the low risk for lenders with help to buy, many high street banks have now opted to take part in the scheme which has sparked competition within the mortgage markets.

Despite the government now taking the risks, high street lenders have not exactly reflected this in their mortgage rates, with rates typically starting from 4.79%. Most banks only use a few select and preferred panel of lenders so before borrowing directly from your bank, shop around as a ‘whole of market’ mortgage broker can offer you a wider range of deals from whole of the mortgage market.

If you have more than a 5% deposit, you’ll probably get a better interest rate by taking a mortgage direct with a lender rather than through the help to buy scheme, so check first which deals are available with the deposit you have.

Let’s take a closer look at the two schemes, equity loan vs mortgage guarantee.

Help to Buy Scheme 2:  Mortgage guarantee

  • You can buy property up to the purchase price of £600,000.
  • You’ll a minimum deposit of 5% of the purchase price and you’ll need a mortgage of up to 95% for the remainder.
  • It’s available to both first time buyers and anyone moving home but it must be their only property and residence.
  • It’s available for purchase of pre-owned property (re-sale) or new build property in England.
  • You cannot let your property if you purchase a property through the scheme.
  • You cannot have an interest only mortgage on the property.
  • The property cannot be a shared ownership or shared equality purchase.
  • The scheme cannot be used in conjunction with any other public funded mortgage scheme.
  • There’s no limit to your income to be eligible for the scheme. Acceptance will still be subject to credit checks and affordability.
  • The scheme will run for 3 years ending 31st December 2016.

You can apply with any lender taking part in the scheme. Participating high street lenders are Aldermore, Bank of Scotland, Barclays, Halifax, HSBC, Lloyds Bank, NatWest, RBS, Santander and Virgin Money.

 

How does help to buy scheme 2 work?

Let’s say a propertyis up for sale in Sutton for £150,000, you’ll need a minimum deposit of 5%

5% = £7,500

You’ll need to secure a mortgage for the remaining 95% being £142,500

£150,000 – £7,500 (5%) = £142,500 (95%)

You’ll be free to sell your property whenever you wish and keep 100% of any money you make, once you have repaid the mortgage.

As you can see, the help to buy scheme 2 helps you buy a home with just a 5% deposit.

In order to get lenders to provide 95% mortgages, the government had to reduce the risk to the lender, so guarantees 15% of the purchase price to the ‘lender’ should you default on the loan.

Put simply: 15% of £150,000 = £22,500, the amount the government may have to repay lender if you were to default on the mortgage.

 

Help to Buy Scheme 1: Equity loan

Originally, the equity loan scheme was only available to first time buyers but has since opened up to both first-time buyers and home movers but the eqiuty loan scheme is only available on new-build property that is registered to take part in the scheme.

  • You can buy property up to the purchase price of £600,000.
  • You’ll a minimum deposit of 5% of the purchase price.
  • The government will loan you up to 20% of the purchase price and you’ll need a mortgage of up to 75% for the remainder.
  • It’s available to both first time buyers and anyone moving home but it must be their only property and residence.
  • It’s available for purchase of new build property registered to take part in the scheme.
  • You cannot let your property if you purchase a property through the scheme.
  • You cannot have an interest only mortgage on the property.
  • The property cannot be a shared ownership or an equality purchase.
  • The scheme cannot be used in conjunction with any other public funded mortgage scheme.
  • There’s no limit to your income to be eligible for the scheme. Acceptance will still be subject to credit checks and affordability.
  • The scheme will run for 3 years ending 31st December 2016.

 

How does help to buy scheme 1 work?

If a property for sale in Cheam is £200,000, you’ll need minimum deposit of 5%.

5% = £10,000

The government will provide you an equity loan for up to 20% of the purchase price.

20% of £200,000 = £40,000

You’ll need to secure a mortgage for the remaining 75% being £150,000

£200,000 – £10,000 (5%) -£40,000 (20%) = £150,000 (75%)

You won’t pay any fees on the 20% loan for the first 5 years.

In year six, you’ll be charged 1.75% on the loan. Each year thereafter, you’ll pay whatever the rate is using the retail price index plus 1% and this will not count as payment towards the loan borrowed.

You can repay 10%, 20% or the whole amount of the equity loan without having to sell your property, providing it equals to at least 10% of the value of your home.

You’ll be free to sell your property whenever you wish and keep 80% from the sale and will have to repay the government 20% from the sale, regardless of whether the value has increased from when you purchased the property.

Of course, you will have to repay the mortgage too from the 80% but you can keep any money you make thereafter. The equity loan can be repaid either before or when your mortgage period ends.

Other associated costs to buying a property

As with any property purchase, you’ll need to take into account Stamp duty land tax (SDLT). Currently stamp duty is set at 1% from £125,000 to £250,000, 3% from £250,000 to £500,000 and 4% from £500,000 to £1 million, so if you buy a property for £150,000, you’ll need to pay £1,500 SDLT and £500,000 will cost you £15,000 SDLT.

There’s also conveyance/legal fees to consider in the region £1200 on a £150,000 property, mortgage booking and application fees which can vary from £100 to £1,000 depending on lender and mortgage type and possible land registry fee around £150, if not already included in your conveyance quote.

Help to buy is a great opportunity to buy a home with a 5% deposit but ensure you have all the relevant funds beforehand and that you can comfortably afford to repay the loan as with any mortgage, failure to repay the loan may result in your home being repossessed.

 

To find out more or to speak with our mortgage or conveyance team to help with your purchase, please contact Paul Barker on T 020 8626 7862 M 07432 288171 E paul.barker@hxea.co.uk W www.suttonestateagents.co.uk