Help To Buy – Red Hot Property

Help To Buy

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.

Equity Loans

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:

  • The Government lends you up to 20% of the property’s value as an equity loan
  • You will need to contribute a deposit of at least 5% of the property’s value
  • You will also need to arrange a mortgage of 75% of the property’s value

So, if you wanted to buy a house worth £200,000, you would need:

  • A £40,000 loan from the Government
  • A £10,000 deposit put down by you
  • A £150,000 loan from a mortgage lender

What you’ll have to pay back

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.

For example:

  • You take a 20% equity loan to buy a property worth £200,000 – that means you borrow £40,000
  • Then you sell the property, it’s worth £250,000
  • You repay £50,000 – this is 20% of the new value of your home, not the amount you borrowed
  • If the property had dropped in value, you’d pay less than you borrowed

Mortgage Guarantees

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:

  • You put down a deposit of at least 5%  of the property’s value
  • You can borrow up to 95% of the property’s value from a mortgage lender
  • The Government will then guarantee any mortgage borrowing above 80% of the property’s value

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.