Budget 2013: New help to buy scheme – how it works

The big news for prospective homebuyers in this week’s budget was the launch of the new help to buy scheme. It is aimed at helping people buying their first home or move up the housing ladder – specifically those who are struggling to find a big enough deposit.

There are two parts to the scheme an “equity loan” and a “mortgage guarantee” and both aim to improve the access to and affordability of mortgages. Both are also open to a wider audience than previous home ownership schemes which will hopefully increase their impact.

Equity Loan

How will it work? This option will see the Government lend up to 20% of the value of a new build home through an equity loan. The buyer puts up a deposit of their own of between 5% and 20% - the Help to Buy scheme tops that deposit up to make it a 25% deposit which leaves the buyer needing a mortgage for 75% of the property value.

Who can get it? The equity loan will be available to all, not just first time buyers, although it is restricted to new build homes and a maximum property value of £600,000

What does it cost? The loan is interest free for the first five years and then a fee of 1.75% will be charged from year six, rising annually by RPI inflation plus 1%. The equity loan can be repaid at any time within 25 years (or the terms of the mortgage), or on sale of the property. The initial loan is repaid, plus a proportion of any growth in the property value.

When is it available? This scheme is available from 1 April 2013 and is scheduled to run for 3 years. For advice on getting a new mortgage in conjunction with this scheme, visit our website.

Mortgage guarantee

The announcement of the new mortgage guarantee is the more significant development and it firmly targets the dearth of mortgages available to those buyers with small deposits.

How will it work? It will work by providing a guarantee to lenders – effectively underwriting a proportion of the mortgage they lend. If a borrower’s property is repossessed, the Government will cover part of the loss suffered by the lender.

The idea is that this Government guarantee will encourage lenders to offer better access to low-deposit mortgages by mitigating the risk of lending.

Who can get it? Like the equity loan option, this is available to existing homeowners as well as first-time buyers with the same maximum property value of £600,000 – although it’s not restricted to new build homes. You’ll still need your own deposit of 5% or more, but it should give you a better choice of mortgages at lower interest rates.

David Hollingworth, L&C’s Head of Communications, said, “The current mortgage offerings at 95% without the need for additional security are extremely thin on the ground. This guarantee could help to open up that end of the market and make distinct improvements to the price and availability of mortgages.”

When’s it available?We have a bit longer to wait for this option as will not be available until January 2014. The Government says it will provide further details on it later this year.

More information

Some useful FAQs from the Government – https://www.hm-treasury.gov.uk/10012.htm

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