Help To Buy Scheme

This is meant as a brief overview of the new Help To Buy scheme launched by the Government in 2013. It is not a definitive guide to the scheme, so if you have any questions having read through this, please just get in touch.

Background

Since the financial crisis began in late 2007, early 2008, it has become increasingly difficult to obtain a mortgage. At the height of the property boom, it was possible to get mortgages on almost any property, with high income multiples and high loan-to-values. Indeed, one of the characteristics of the boom was 100% mortgages – where you borrow the entire amount of the purchase price. This led to people borrowing too much and lenders losing money on negative equity repossessions.

As a consequence, lenders reviewed their lending policies and reigned-in their mortgage approvals – lending less to fewer people. By April 2013, most lenders would not lend above 80%. This made it difficult for many buyers, in particular first-time buyers, and was acting as a brake on the recovery of the property market in general.

So, the Government announced plans to help more people buy a home. The idea was to help those borrowers who couldn’t afford the full deposit required and the scheme was called Help To Buy. It was launched in two parts.

Help to Buy: Part 1

The first part of the scheme was launched in April 2013 and was aimed specifically at buyers looking to purchase new properties, with a maximum price of £600,000. The scheme is available to all buyers, and is designed to help them buy the property with only a 5% deposit.

The scheme provides an equity loan to the borrower of up to 20% of the purchase price. So the property could be bought using a 75% mortgage, 5% cash deposit and 20% equity loan from the Government.

For the first five years, the loan is free – no interest is payable. After that, there is a fee which starts at 1.75% per year, rising each year thereafter by RPI plus 1%.

The loan can be repaid at any time within a 25 year timescale.

The House View:

“This is a good scheme to connect mortgage lenders, who only want to lend up to 75% of the purchase price, with borrowers who can only afford a 5% deposit. However, the net result is the borrower is borrowing 95% of the purchase price – and that is a high loan to value. The loan still needs to be repaid, although it is at a lower interest rate than would otherwise be payable. Interestingly, it is available to all borrowers – not just first-time borrowers – although the restriction to new-builds does limit its effectiveness at getting the market moving.”

Help to Buy: Part 2

If part 1 was aimed at providing a loan to the borrower, part 2 is aimed at encouraging the lenders to lend more. This time it applies to all properties, not just New Builds, but there is still the £600,000 limit.

In essence this is a guarantee scheme for lenders. The Government guarantees to repay to the lender up to 15% of the value of the property in the event the borrower defaults. It is designed to help the lenders, not the borrowers – the borrower will still be liable for the whole mortgage, but the lender will not lose out in the event of negative equity repossession.

So the property could be bought with a 95% mortgage and a 5% cash deposit.

The House View:

“This scheme has been much more effective at getting the market moving. It gives the lenders confidence to lend up to 95%, and is available for all properties. However, it is important not to view this as an indemnity for borrowers – they will still be liable for the whole mortgage, and borrowing 95% of the property price is something which should be considered very carefully before proceeding. However, for first time buyers getting on the property ladder, it could be a good solution.”

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