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Help to Buy mortgages

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How the government incentive works

The recent news that the Government was bringing forward the start of the second phase of its Help to Buy mortgages scheme has been welcomed by home buyers. This effectively means that there will now be a wider choice of mortgage products available for just a 5% deposit. If this could help you get on the property ladder or move to a bigger home, what exactly is involved and how will it work?

What is Help to Buy?

The first stage of the Help to Buy scheme was launched in April 2013 and applies only to new build properties. Buyers can buy through a registered builder with only a 5% deposit and then receive a Government equity loan for up to 20% of the value. A mortgage is taken out with a participating lender for the additional 75%. This element is still available and applies to both first time buyers and movers, who are buying their only property. It’s expected to run until March 2016 or when the £3.5 billion pot runs out.

The loan is interest free for the first five years. Buyers can repay it at any point, as long as they cover at least 10% at a time. Otherwise it will need to be paid off when the house is sold or the mortgage product comes to an end. They will repay the same percentage of the market value as they initially borrowed based on current house prices. Therefore, if the value of the house has declined they will pay back less, but the amount will increase if prices have risen.

The Government always intended to launch the mortgage guarantee element of Help to Buy in January 2014, but it has brought forward the start to allow lenders to begin processing applications. Through this part of the scheme buyers will be able to access a wider range of mortgages that only require a 5% deposit. The participating lenders will then pay into a Government insurance scheme, which will guarantee a further 15% of the mortgage in case the buyer defaults. It’s intended that the scheme will be available for three years, with £12 billion of guarantees offered.

These mortgages can be used to buy both new build and existing properties valued at up to £600,000. help to buy mortgageThey won’t be available to help purchase second homes or for buy to let properties. Borrowers will only need between a 5% and 20% deposit. However, they will still need to meet the lender’s borrowing criteria to ensure they can afford the repayments. The Government’s aim is for the interest rates charged on lower deposit mortgages to fall by making the market more competitive. Before the launch of the scheme, there were very few available and those that were attracted high interest rates. There will still be more attractive rates though for buyers with larger deposits.

Applying for the Help to Buy equity loan

If you want to purchase a new build property through the equity loan scheme, then you first need to look for a registered developer who’s building in the area you want to move to. Once you’ve found a property to buy, a local Help to Buy agent will take you through the rest of the process. Mortgages for this scheme are available through a number of lenders, including Halifax, Nationwide, Santander and Barclays.

How to apply for a Help to Buy mortgage guarantee

Applying for this type of mortgage is done in the same way as any other product. The only difference is that you must use one of the participating lenders. The first banks to sign up to the scheme were RBS, Natwest and Halifax. Other major lenders, including Barclays, HSBC, Santander, TSB and Virgin Money have indicated that they will start to offer them in the near future.

Buyers will not have to deal with any additional paperwork or forms as a result of the mortgage guarantee. This side of the scheme will be dealt with entirely by the lender and the customer won’t notice a difference. As with any other mortgage product, you should research the market thoroughly to find the product with the best deal for you. As the scheme is still in the early stages, there are only a limited number available. However, as more banks launch their mortgages, it’s hoped that interest rates will fall.

Should I get a Help to Buy mortgage?

If you were already considering moving or buying your first property, then the Help to Buy scheme could help you achieve this goal sooner. You need to ensure that you can comfortably meet the repayments and it’s important not to overstretch yourself. There’s the temptation now that you only need a 5% deposit to increase the budget you have available. However, you also need to take into account any increases in the interest rates, to make sure you could still afford to repay it.

Whatever part you want to use, taking out a new mortgage is still a big commitment. It’s important that you look into all the pros and cons before taking on a large debt. Further details on both parts of the scheme can be found at http://www.helptobuy.org.uk/.

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About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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