The Government has created the Help to Buy scheme to help people take steps to buying their own home; either getting their foot on the property ladder or moving up it into a bigger home. Help to Buy makes it possible to buy a new-build or existing home, priced up to £600,000, with as little as a 5% deposit
Under the Help to Buy scheme there are two different options for you to consider: equity loans and mortgage guarantees.
Help to Buy equity loans are open to first-time buyers and home movers, but only if you would like to buy a new-build property. You can’t use an equity loan to purchase an older property.
Equity loans work like this:
So, if you wanted to buy a house worth £200,000, you would need:
Under the Help to Buy scheme, the equity loan is interest free for the first five years. From the sixth year onwards you will pay an admin fee which will start at 1.75% of the loan. From here, the admin fee will increase every year by any increase in the Retail Price Index plus 1%.
Remember, you will be paying these fees in addition to your mortgage repayments. The equity loan from the Government will not be decreasing in size – unless you opt to repay part of it early – so over time, the cost of the admin fee could become expensive. You can choose to repay part of the loan early in chunks of either 10% or 20% of the total value borrowed.
You will need to repay the equity loan in full after 25 years, when your mortgage term finishes or when you sell your home – whichever happens first. You will repay the market value of the loan at the time, rather than the amount you originally borrowed when purchasing your home.
Mortgage guarantees also help you to buy a home with a deposit of 5% of the purchase price. It’s open to both first-time buyers and home movers for new-build and older homes in the UK with a purchase price up to £600,000.
Most of the UK’s biggest mortgage lenders have signed up to offer Help to Buy mortgages and they work like this:
For example, if you took out a 85% mortgage, the Government would guarantee to repay your lender up to 10% of its value if you defaulted.
All of this take places behind the scenes between the Government and the lender, so for you as the homeowner (and therefore the borrower), it’s not any different to any other mortgage – you are still responsible for repaying the whole loan and could face repossession if you fall into arrears.