Accountancy Resources
Property prices keep going up, with house prices in London more than double those in the rest of the country.
UK house prices in March 2014 were 9.5% higher than the previous year, but London house prices were an incredible 18% higher. The average house price in the UK in March 2014 was £180,264 compared to £362,699 in London*.
Higher house prices mean larger deposits are required for people to be able to either buy their first home or to move to a new one. Tough economic circumstances in recent years have made it practically impossible for many people to be able to save enough money to afford this large deposit.
The Help to Buy scheme was created by the government to help people afford to be able to buy their own home up to the value of £600,000 with a relatively small deposit – just 5%. It is designed for first-time buyers and existing homeowners, allowing people to either get a foot on the property ladder or to help them move up it. It is also for people who need help and are purchasing a property they intend to live in, not one they intend to let out or use as a second home.
In March 2014 it was announced that 17,395 households had bought homes under the scheme in its first nine months. Of these, 88% were first-time buyers. The average price of a home bought under the Help to Buy scheme was £194,992. The Prime Minister has spoken about the Help to Buy scheme, saying it “is a key part of our long-term economic plan, giving thousands more people the security and independence that comes from owning their own home”.
There are two different parts of the Help to Buy scheme – the Help to Buy Equity Loan and the Help to Buy Mortgage Guarantee. We explore both options below.
The Help to Buy Equity Loan scheme was launched in England in April 2013, and in his 2014 budget, the Chancellor announced plans to extend it from the end of 2016 until the end of the decade. It is for new build homes only, and you must buy your new build home from a registered Help to Buy builder. Most well-known developers are registered as Help to Buy builders. It is worth noting that the house you are buying cannot cost more than £600,000.
The way it works is that you need to put down a minimum deposit of 5% of the value of the property. The government then lends you up to 20% of the cost of your new build home, topping up your deposit. With this 20% loan added to your 5% deposit, it means that you only have to apply for a 75% mortgage to make up the remainder of the cost of your new build home. Borrowing for a 75% deposit rather than, for example, a 95% deposit means you will be able to access better mortgage rates. So, if the home you wanted to buy cost £200,000, you would need to find a cash deposit of £10,000 (5%), you would get a loan from the government of £40,000 (20%), and your mortgage would be £150,000 (75%).
Help to Buy Equity Loan is available to first-time buyers and people who already own a home and are looking to move. However, it is not available to people who own another property at the time they buy their new home. You cannot sublet the home that you use the Equity Loan to purchase, and will not be able to enter a part exchange deal on your old home. This scheme is only available in England. Alternative, similar schemes are run by the devolved governments in Scotland (launched in September 2013) and Wales (launched in January 2014).
The scheme is run by Help to Buy agents, who are appointed by the Government’s Homes and Communities Agency. They have the authority to give the go-ahead for you to purchase a home using the scheme. They should have a list of registered Help to Buy builders to choose from. To find your local Help to Buy agent, click here.
The Help to Buy Equity Loan is separate from your mortgage and is between you and the government. You are not charged loan fees on this 20% loan for the first five years that you own the home. If you pay back the loan during the first five years, you will not incur any charges at all. In the sixth year of owning your home, you are charged an admin fee of 1.75% of the value of the loan. The fee then increases each year after this, with the increase calculated using the Retail Prices Index plus 1%. Your Help to Buy agent will contact you before you start paying the fees to set up monthly payments with your bank. Each year you will be sent a statement about your loan. The fees don’t count towards paying back the Equity Loan itself.
You must pay back the loan when you sell your home, or after 25 years if you have not sold it in that period. When paying back your Equity Loan, the amount is calculated using the current value of your home, not its value when you originally purchased it. So, if you bought your home for £200,000, and borrowed £40,000 (20%) to buy it, and then sold it for £250,000, you would have to pay back £50,000 (20%). As you can see from this example, if your property increases in value, you will have to pay back more than you originally borrowed. Of course, if your property decreases in value, you will have to pay less than you originally borrowed.
You can pay back all or part of your loan at any time, but the minimum percentage you can pay back is 10% of the market value of your home. So, if you bought your home for £200,000, and borrowed 20% of that under the scheme (£40,000), and when you wanted to pay back some of the loan your house was valued at £220,000, the minimum you would be able to pay back would be £22,000 (10% of the value of the property).
Almost 15,000 of the 17,395 homes bought through Help to Buy in its first nine months were bought with the Equity Loan. 89% of people who used the Equity Loan in the first nine months of Help to Buy were first-time buyers. If you choose this option it is worth remembering that you will be paying the Equity Loan and the Equity Loan admin fees in addition to your mortgage repayments.
The Help to Buy Mortgage Guarantee began in the UK in October 2013 and is currently due to run until 31st December 2016. It was introduced because few people have been able to afford the large deposits required by mortgage lenders in recent years. In 2008, the number of 95% mortgages available on the market was 750, but by October 2013 there were only 44. The Help to Buy Mortgage Guarantee aims to help people with small deposits to buy a house or to move house.
Under the Help to Buy Mortgage Guarantee scheme, the government offers mortgage lenders the option to purchase a guarantee on mortgage loans. This means there is less risk to the lender, who is insured against losses if the homeowner defaults on their payments. This allows lenders to offer home buyers more high-loan-to-value (or high LTV) mortgages, which are loans of between 80% and 95% of a property’s value. This means that home buyers have to find less cash for a deposit – a minimum of 5%.
The guarantee is provided by the government to the mortgage lender, not to the person purchasing the house, so the buyer doesn’t have to do anything. You do not have to pay an additional fee to get a Help to Buy supported mortgage. Everything goes on behind the scenes, so as far as the homebuyer is concerned, it works in practically the same way as any other mortgage. Borrowers are still fully responsible for their mortgage repayments, and so your lender will carry out checks to make sure that you can afford the mortgage and that you do not have any history of financial problems.
To be eligible for the Help to Buy Mortgage Guarantee, the property you are purchasing has to cost less than £600,000. Any property in the UK that comes under this category is eligible to be purchased as part of the Help to Buy mortgage guarantee. According to Rightmove, that is around 90% of all properties on their site. The Help to Buy Mortgage Guarantee is open to both first-time buyers and people moving home. It does not matter what your income is. Unlike the Help to Buy Equity Loan, the property being purchased doesn’t have to be a new build – it can be an existing (pre-owned) house as well, and it must be located within the UK.
However, you cannot own another property anywhere else in the world at the time you buy your home with help from the Help to Buy Mortgage Guarantee (so you cannot use it to buy a second home), and you cannot then rent the property out to somebody else after you buy it. The mortgage can also only be taken out by an individual or by individuals, not by a company. The mortgage cannot be an interest-only one, an offset one, or a guarantor one – it must be a repayment one. If you use the Help to Buy Mortgage Guarantee scheme, you cannot use any other government scheme, such as Help to Buy Equity Loan or shared ownership and the deposit cannot come from a government scheme either.
The Help to Buy Mortgage Guarantee scheme is offered by mortgage lenders across the UK. The following lenders are already in the scheme:
Just because a mortgage is offered under Help to Buy, it doesn’t mean it is the cheapest option. This scheme enables lenders to offer more high LTV mortgages, but lenders are still free to set their own interest rates, which may be higher than lenders who are not participating in the scheme, so make sure you shop around. In the first nine months of the Help to Buy scheme, 82% of Mortgage Guarantee customers were first-time buyers. For help and advice regarding mortgages and finance matters, contact the independent Money Advice Service which has been set up by the government, or speak to a mortgage broker.
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