Many people are struggling to see how they might ever take that first step onto the property ladder, or move their growing family into a bigger home. With house prices rising, the government’s Help to Buy scheme aims to bridge the gap between a bullish property market and buyers who have been outpaced by the boom.
Two Help to Buy schemes
There are actually two types of Help to Buy scheme – equity loans and mortgage guarantees.
Both schemes are open to first-time buyers and to movers who can provide a minimum deposit of 5%. The property must be in the UK, be purchased using a repayment mortgage (not interest-only or offset) and can’t be let out to other people once purchased.
Those who own other property anywhere in the world, along with people raising their deposit from another government scheme, aren’t eligible.
Mortgage guarantees mean that the government effectively underwrites a portion of your mortgage. They’re available until 31 December 2016 (or until the government’s £12 billion budget for the scheme runs out), and you can buy either a new-build property or an older home, with a purchase price of up to £600,000.
Equity loans are limited to new developments only and maximum purchase prices vary, as we’ll explain shortly.
The application process for mortgage guarantee is also much simpler. Just talk to a participating lender, such as Barclays, and they’ll tell you which of their mortgages are available under the guarantee scheme.
Equity loans are more complex and you’ll need to apply via an intermediary called a HomeBuy agent.
The government will lend up to 20% of the purchase price of a new-build property in exchange for an equivalent share in its value (although you retain the actual ownership).
The appealing thing about equity loans is that you don’t pay any interest on the money loaned by the government for 5 years, although you’ll need to make the monthly mortgage payments as usual. After 5 years, the government charges you an annual fee of 1.75% of the money they provided, and this will rise annually at 1% above the retail prices index (the standard measure of inflation).
The limit on the maximum property purchase price varies depending on where you want to buy, as England, Scotland, Wales and Northern Ireland administer their own equity loan schemes under Help to Buy. Currently, the limit is £600,000 for England and Northern Ireland, £400,000 in Scotland and £300,000 in Wales, although the amount you can borrow as a mortgage will be decided by the mortgage provider, based on your financial situation.
To apply, you’ll need to fill in a property information form from a Help-to-Buy-registered homebuilder and reserve the home (there’s often a fee for this form). Then you’ll need to find your local HomeBuy agent, who will assess whether you can afford to make payments. One way agents will assess your ability to pay is by checking that your total monthly costs to own the property are no higher than 45% of your monthly net income.
The agent will also check whether applicants genuinely need help to buy. If they think you could afford more than 90% of the purchase price by combining a deposit with slightly higher borrowing than you’ve applied for, you could be turned down altogether. The agent will ask for proof that you’ve confirmed your financial status through an independent financial adviser, and they’ll recommend one if you haven’t. They’ll also want evidence that you have the money for your deposit, legal fees, and stamp duty if needed.
Once these requirements are met, the agent will send you an ‘authority to proceed’. Give this to your solicitor or conveyancer, who will explain your rights and responsibilities under the scheme, and when you’re ready to exchange contracts they’ll get final approval from the HomeBuy agent. Once the purchase is complete, a Post-Sales HomeBuy agent will administer your future Help to Buy fees and manage your equity loan repayments.
Don’t forget that you’re not simply borrowing money – you’re giving the government a part-share in the value of your home. The amount you have to repay is based on a percentage of the value of the property.
You have to repay the equity loan either within 25 years or when you sell the property, whichever comes first. Either way, the Post-Sales HomeBuy agent will ask for an independent valuation of the property at the time. If your home has increased in value, the repayment figure will be higher. For example, say you borrowed £40,000 in an equity loan to purchase a £200,000 property – that means the government’s share of the equity in your home is 20%. If you later sold it for £250,000 (or it’s assessed at that value after 25 years), you’d have to pay back 20% of that price, so £50,000.
If the value falls, thankfully, so does the value of the Chancellor’s share. However, the government – through the Post-Sales Homebuy agent – will check that the value is equivalent to the open market price. If they think you’re trying to sell on the cheap, the sale will be blocked and you could face criminal prosecution.
But you can still pay off all or part of the equity loan early. ‘Staircasing’ payments – paying back a proportion early – will gradually reduce your equity loan. If property prices continue to rise, you’ll have less to repay if you sell the property or reach the 25-year limit. Even better, it will lower the amount of equity loan you’ll start paying annual fees on after 5 years. Staircasing payments must be a minimum of 10% of the market value at the time of repayment – your Post-Sales HomeBuy agent will help with the assessment.
Help to Buy could open the door to your new home, but as with all significant commitments, you should seek independent advice before agreeing to any type of property purchase. And don’t forget that your home may be repossessed if you do not keep up repayments on your mortgage. Start with the Money Advice Service.