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The Government and mortgage lenders have been wittering on about the ‘help to buy’ scheme for the last few weeks but what does it really mean for you and how will it affect your chances of getting onto the property ladder? Let’s take out all the long words and complicated dialogue and look at it simply.
The help to buy scheme consists of two options for people looking to buy their new home – a mortgage guarantee or an equity loan, both of which were supposed to be introduced in January 2014 however they will now be available from 7th October 2013.
So which one is right for you?
Looking for your first home? Wanting to upsize from your current property? The mortgage guarantee is available to first-time buyers and existing homeowners who are looking to buy either previously owned or new build properties which means it can be used to purchase pretty much any residential property on the market, in the UK (up to the value of £600k). All you need is a 5-20% deposit and be able to prove that you are a British citizen and only own one home.
Simple enough so far. Previously, mortgage lenders have seen buyers with a 5% deposit as more of a risk and therefore they have offered higher interest rates on the mortgage. The mortgage guarantee means that the government will secure repayment of the loan should the buyer default on the repayments and the property is repossessed.
Will you still own 100% of the property?
Yes
Why are they doing this?
To help get buyers back on the market. Mortgages and interest rates are thought to become very competitive, with lenders having more security in the fact that they know the mortgage will be repaid, whether there is a 5% deposit or a 20% deposit on the property. It assists both parties. Nevertheless, only some lenders have signed up for this so far with Lloyds, RBS and Natwest being some of the first. Other lenders, it seems, have decided to see how it goes before they commit to signing up so it’s important to check if your preferred lender will accept the guarantee.
On the other hand, the Government equity loan allows first time buyers in the UK (except Wales), a chance to get on the property ladder by taking out a loan of 20% of the property value. Buyers will need a 5% deposit and the government will ‘top up’ 20% of the mortgage so you will only be paying back 75% of the mortgage. Nevertheless, the Government aren’t just giving money away. When it comes to selling the property or the end of the mortgage repayments, whichever is first, the buyer will have to repay the Government loan.
Are there any other payments you should know about?
Yes. After five years of owning the property, you will have to start paying interest on the loan. In the sixth year, you will be charged a fee of 1.75% of the loan value, working out to be £350 on a £20k loan. That interest rate will increase each year by the retail price index plus an additional 1%.
Will you still own 100% of the property?
No. With the equity loan scheme, you will always need to pay back 20% of the property value.
