Help To Buy Mortgages
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Help to Buy has helped thousands of would-be homeowners to get onto the property ladder, and we are approached by hundreds of customers asking for more info so have produced this guide to answer the most common questions on the scheme, including:
- What is Help to Buy?
- How does it work?
- How do I apply for Help to Buy?
- What are the advantages and disadvantages of Help to Buy?
- Anything else I need to know?
- What alternatives are there?
What is Help to Buy?
The Help to Buy equity loan scheme is designed to help first time buyers purchase a property with a small deposit, and to assist existing homeowners who wish to move to a new-build home, while also allowing members to access better mortgage terms and lower interest rates.
Equity Loans up to 20%
It is restricted to new build properties only (as well as to maximum valuation amounts and regional price-caps), with borrowers required to pay 5% of the property value as a deposit, the government lending up to 20% (or 40% in London) and the remaining 75% covered by a standard repayment mortgage.
The scheme allows members to take advantage of cheaper or more competitive lending rates by using higher deposit amounts to reduce their mortgage loans and to borrow for the first five years without paying interest (although mortgage payments will need to be maintained throughout this period and a nominal management fee will also be applied).
Subsequent rates are charged at 1.75% of the borrowed figure with a further 1% applied for every ensuing year (as well as any Retail Price Index inflationary increases).
How do I apply for Help to Buy?
Customers who wish to apply for a Help to Buy equity loan will need to contact their locally appointed agent or registered developer. They will need to prove that the house that they intend to buy will be their only property and will not be sub-let or rented out after purchase, while mortgage applications will be subject to the usual incomes, outgoings and credit history assessments.
Help to Buy is offered by a network of regional based Help to Buy agents (including local housing associations and other registered providers) and are appointed by the government’s Home and Communities Agency (HCA) to oversee the application process, provide information and advice and to handle any repayment transaction that borrowers may choose to make.
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When and how do I repay the Help to Buy loan?
Depending on which happens sooner, borrowers will need to repay their loan in its entirety once the mortgage comes to term, the property is sold or a period of 25 years elapses.
Borrowers are not obliged to repay any of the amount before this time, although it is advisable to do so as any ensuing increase in the value of their property will affect the amount that they will be need to pay back to the government (meaning that if the property has risen substantially in price over the term of the loan, the amount that they have borrowed will need to be repaid as a percentage of the prevailing market value as opposed to its original cost- a potentially significant hike).
Buying more of the property
This can be done via a process known as ‘staircasing’ (which is essentially a multiple payment system) and can be considered at any point after the first 12 months of purchase.
The minimum amount that borrowers can staircase at any one time is 10% of the value of the property, although they will also need to hire an independent surveyor to determine its current market value (with fees for this service varying from £2-300) and to pay an administrative fee (of around £200) to the post sales Homebuy Agent that handles the transaction- a considerable outlay.
Alternatively, owners who are reaching the end of their five-year interest-free period could consider remortgaging their property (so as to pay off some or all of their loan) or take advantage of rising house prices by selling up and using the profits to remove debts.
What are the advantages of Help to Buy?
There are a number of notable advantages to using the Help to Buy scheme, not least the ability for cash-strapped purchasers and/or existing homeowners who want to move up the property ladder to buy a property with a smaller than average deposit amount and to access rates of interest from lenders that are significantly better than those offered for a standard 95% LTV mortgage.
In addition, the five-year interest-free borrowing period allows buyers who are struggling to balance mortgage payments and/or other outgoings to reduce short-term costs and to plan for the future properly, while also offering competitive rates in the future.
What are the disadvantages?
Although interest payments are suspended for the first five years of the loan, subsequent rates (which, as we have seen, rise by 1% over inflation for every year beyond the first six, from a base rate of 1.75%) can prove to be extremely expensive for borrowers in the
long-term (especially if the RPI rate of inflation or the value of the mortgaged property increases substantially within that period).
Moreover, many experts believe that the scheme is stimulating levels of demand which are becoming increasingly difficult to satisfy (due to steadily decreasing supplies of available housing stock) and is raising current house prices beyond the grasp of many customers while making it difficult for existing customers to sell their properties on by forcing them to compete with properties being sold as Help to Buy.
In addition, borrowers are restricted to buying new build properties only, while the number of lenders who offer Help to Buy mortgages can also be limited.
How popular is Help to Buy?
In a word, very. Indeed, according to recent figures published by the Treasury, almost 145,000 equity loans were granted between March of 2013 (when the scheme was first launched) and March of this year, with 81% of these being granted to first time buyers (at an average loan amount of £52, 834).
Anything else I need to know?
Although the Help to Buy equity loan scheme was originally intended to run until 2021, this deadline has now been extended by a further two years as part of Chancellor Phillip Hammonds Autumn budget statement (to March 2023).
However, a couple of significant restrictions and variations will also be applied to future borrowers, with the scheme being limited to first time buyers only (from April 2021 onwards) and the government introducing regional price caps on the maximum property values that scheme members will be able to borrow against (with each regional figure set at 1.5 times the current average first time buyer price forecast as opposed to the current universal cap of £600,000). These are as follows:
- North East: £186,100
- North West: £224,400
- Yorkshire and the Humber: £228,100
- East Midlands: £261,900
- West Midlands: £225,600
- East of England: £407,400
- London: £600,000
- South East: £437,600
- South West: £349,000
The government has also announced that it will not continue to offer the Help to Buy scheme beyond its current deadline of March 2023.
What was Help to buy 2?
Help to Buy was originally conceived and introduced as a two-tier system, with the first part (Help to buy 1) covering the Equity Loan scheme and the second part (Help to buy 2) encompassing what was known as the Mortgage Guarantee scheme.
This arrangement (which was closed to new loans as of the 31st of December 2016 in accordance with the original government deadline) was applied to both new-build houses and existing properties, with buyers providing a 5% deposit and the government guaranteeing a further 15% of the property value to mortgage lenders.
What is a help to buy ISA?
The government continues to offer its Help to Buy ISA for first time buyers who wish to buy properties with a market value of £250,000 or less (or £450,000 in London).
The scheme allows prospective buyers to build up deposit amounts by paying a 25% ‘bonus’ for every £200 that is paid into their ISA account above a minimum starting figure of £1,600 (to a maximum bonus of £3,000) and will be available to new savers until the 30th of November 2019 (although existing holders will be able to continue paying into their ISA’s as long as they claim their bonus by the 1st of December 2030).
What alternatives are there to Help to Buy?
As well as the Help to Buy ISA mentioned above, customers who wish to pursue an alternative means of property ownership should consider
- applying for a higher LTV mortgage (although the rates for these loans will invariably be higher than for mortgages with higher deposit amounts),
- the Shared Ownership Help to Buy scheme (which involves using a deposit and mortgage combination to buy a percentage amount of a property- typically between 25-75%- and then paying rent to a local housing association on the remaining share) or (if under 40 years of age)
- a Lifetime ISA (which guarantees a 25% ‘top up’ for every £1 that is saved- to a maximum amount of £450,000- and can be used to buy a property in the future).