Help to Buy is a government initiative to help people who are struggling to find the deposit to buy a home. It's available to first time buyers, and to existing homeowners who are finding it difficult to move further up the housing ladder.
How does help to buy work?
There are three ways that Help to Buy can help, two of the schemes are for properties that cost no more than £600,000, whilst the third is for properties up to £250,000 (£450,000 in London):
- themortgage guarantee - for people buying new build properties or homes that are already lived in
- the equity loan - available only on new build properties
- Help to Buy ISA - this is a new scheme that helps people save towards their first home.
Help to buy mortgage guarantee
How the scheme worksThis is for people who have only a small deposit, as low as 5% of the value of the house you're buying. If you've a bit more saved up, you can still apply if you have a larger deposit, even up to 20%.
Normally you'd have difficulty getting a good mortgage deal with a small deposit which is why this scheme has been created. With the mortgage guarantee, lenders can choose to buy a guarantee on your loan from the government.
This guarantee acts as insurance for lenders. It compensates them for any losses they suffer if they have to repossess your property because you've defaulted and then can't sell it for enough to cover your mortgage debt.
The scheme is open to first time buyers and to people who already have a mortgage.
Who is eligible for Help to Buy mortgage guarantee?Not everyone is eligible for the mortgage guarantee scheme. To qualify you must:
- be paying £600,000 or less for the house
- not rent it out after you've bought it
- not have it as a second home
- not be a shared ownership or shared equity buy.
Apart from that, anyone can apply regardless of how much you earn, though you'll still have to go through the lender's credit checking process.
Help to buy equity loan
How the scheme worksThe equity loan scheme is only for people who are buying new build properties.
With it, the government lends you 20% of the price of the house you're buying and this loan is interest free for the first five years.
You need put down a deposit of just 5% of the sale price so, with the government contributing 20%, you'll need a mortgage for only 75% of the buying price. That cuts the cost of buying a lot and, on top, you pay no interest on the loan for the first five years.
Then in year six you start paying interest at 1.75% of the amount of the government's loan. In following years, the interest rate will go up each year by the rate of inflation (measured by the Retail Prices Index or RPI) plus 1%.
As it's a loan, you'll have to repay the money at some stage. You can do this at any time while you're living in the house but you must do it after 25 years if you're still there. If you sell the house sooner, you'll have to repay the loan when you move.
There's possibly more help for people living in London in the pipeline where house prices are extremely expensive. Anyone buying a new build house in Greater London could apply for a 40% equity loan so they'll need a mortgage for just 55% of the cost of the house, but this scheme is not likely to be available until early 2016.
Who is eligible for a Help to Buy equity loan?First time buyers and existing homeowners can apply for an equity loan although, if you already own a house, you'll have to sell it when you move to the new one.
You can apply for an equity loan if:
- you're paying no more than £600,000 for the house
- you can put down at least a 5% deposit
- it'll be the only property you own and the place where you live
- you won't rent it out
- you're buying from a builder who has registered for the scheme
- you don't want an interest-only mortgage
How long will the Help to Buy schemes be available?The government has extended the original cut-off dates for both the Help to Buy mortgage guarantee and the Help to Buy equity loan.
The Help to Buy mortgage guarantee is now due to close at the end of December 2016. The Help to Buy equity loan will keep going until at least 2020.
Help to Buy IsaThis is a new scheme that helps people save towards their first home. It's free money from the government.
You can save up to £200 a month in a Help to Buy Isa and the government will add another 25% to however much you save. For every £200 you put aside, the government puts in £50. There's a limit to how much the government will contribute - the maximum bonus you can claim is £3,000. To earn the maximum bonus you need to save £12,000.
When you're ready to buy a house, the government pays the bonus to whoever you're buying from. It's all done through your solicitor. You won't get the money yourself but you can combine the Help to Buy Isa with either a Help to Buy mortgage guarantee or a Help to Buy equity loan.
It's for first time buyers only who must:
- have a mortgage
- live in the house themselves
- not rent out the house
- save at least £1,600 in the scheme before claiming the bonus
- be UK residents
- not own any other property anywhere in the world
- not be paying into a cash Isa in the same tax year
- buy a house costing up to £250,000 or £450,000 in London claim the bonus by 2030.
Our mortgage advisers are happy to answer any questions you have on the Help to Buy schemes. There's no obligation and no charge for our service. It's fee free.