Help to Buy scheme
Help to Buy is a government scheme designed to help people with limited deposits buy their first property or move home.
The scheme is available to both first time buyers and existing homeowners who are finding it hard to move up the property ladder.
Originally there were three parts to the Help to Buy scheme:
• Mortgage Guarantee - for people buying new build properties or homes that are already lived in
• 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.
However, the Mortgage Guarantee scheme, which aimed to help buyers with only a 5% deposit by enabling lenders to buy a guarantee on their loans, finished at the end of 2016. The guarantee meant that lenders would be compensated if you defaulted on your mortgage and it couldn’t be sold for enough to cover your mortgage debt.
Although this part of the scheme has now ended, an increasing number of lenders now offer mortgages to those with a 5% deposit. Average rates on 95% loan-to-value (LTV) deals have also fallen, although buyers must meet strict affordability criteria to qualify.
Here's how the remaining parts of the scheme work:
Help to buy: Equity Loan mortgagesThe Help to Buy: Equity Loan scheme is due to run until at least 2020.
If you live in England, under the scheme, which is only available for new-build properties, you need to put down a 5% deposit. The government will lend you a further 20% of the property price interest-free for the first five years. That means you’ll only need a mortgage for the remaining 75% of the property price, reducing the amount you have to pay each month.
After the five-year interest-free period finishes, you’ll be charged interest on your loan from the government at 1.75%. The interest rate will increase every year by the rate of inflation, as measured by the Retail Prices Index (RPI) plus another 1%.
You can repay the loan at any stage, but it must be paid off within 25 years. If you sell the house sooner than this, you must repay the loan when you move. The initial loan is repaid, plus a proportion of any growth in property value.
You’ll only be eligible to apply for the equity loan part of Help to Buy if the property you are purchasing costs £600,000 or less. There is no maximum income requirement, which means that even those on high salaries can qualify.
The property you are buying must be your only home, and you can’t use the scheme to buy a property to let out. Properties must be purchased from a builder who has registered for the scheme. You can only use a repayment mortgage rather than an interest-only deal if you want to buy using the equity loan scheme.
Find out more about the Help to Buy: Equity Loan at www.helptobuy.gov.uk/equity-loan/equity-loans/
Help to Buy LondonIf you‘re buying a new build property in London, where property prices are highest, you can apply for a government loan worth up to 40% of the property price. Once you’ve put down your 5% deposit, this means you’ll only need a mortgage for 55% of the property price.
As with the Help to Buy scheme outside the capital, the loan is interest-free for the first five years, but in year six you will be charged 1.75%. After that the fee will increase by 1% plus any increase in the Retail Prices Index measure of inflation. Even if the RPI falls, the equity loan portion of the mortgage will still attract a loan fee of at least 1%.
Find out more about Help to Buy London at www.helptobuy.gov.uk/equity-loan/london-help-to-buy/
Help to Buy mortgage ratesMost lenders offer Help to Buy mortgages, and as with other mortgages, rates will vary depending on which type of mortgage deal you want to go for, for example whether you are choosing a fixed or variable rate mortgage, and which provider you choose. Help to Buy mortgage rates aren’t necessarily lower than rates offered by standard mortgages, so it’s worth comparing a wide range of deals to make sure you’ve found the best mortgage to suit your needs.
Help to Buy mortgage lendersPlenty of lenders offer Help to Buy mortgages.
Some of the major plays which provide them include:
• Virgin Money
• Post Office
• Lloyds Bank
There are other smaller providers, including many building societies, which also offer Help to Buy mortgages. Whilst you only need a minimum 5% deposit with a Help to Buy mortgage, bear in mind that the bigger the deposit you can afford to put down, the greater the choice of mortgage products you’ll have available to you. Remember that you’ll also need an equity loan – to find one you’ll need to speak to the Help to Buy agent in the area you want to buy or a local developer registered with Help to Buy. You then apply for an equity loan and if your application is successful, you can add this to your deposit and apply for a mortgage for the amount you need.
Help to Buy repaymentHelp to Buy mortgages work in the same way as other mortgages, so you make monthly repayments for a set term until your mortgage is paid off or you sell your home.
When it comes to Help to Buy equity loan repayments, there’s no interest to pay on your Help to Buy Equity loan for the first five years. After that, there are fees equivalent to 1.75% of the loan. This increased every year based on inflation plus 1%.
The loan only needs to be repaid when your property is sold, or at the end of your mortgage term, whichever happens first. If you want to pay back some or all of the loan early, the minimum repayment you can make is 10% of the property’s current value.
You’ll need to pay to have the property independently valued by a surveyor to work out how much you’ll need to repay. There may also be an administration fee to pay, usually around £200 which is payable when you pay back some or part of your Help to Buy equity loan.
Is Help to Buy only for new builds?Yes, the equity loan part of Help to Buy only applies to new build properties costing up to £600,000, so if you want to buy an older property, you won’t be eligible for this part of Help to Buy.
The mortgage guarantee scheme, which is no longer available, applied to both new build and pre-owned properties.
Is Help to Buy worth it?The Help to Buy equity loan can be really useful for first-time buyers who are finding it impossible to build up more than a 5% deposit.
The fact that the equity loan is interest-free for five years can provide valuable financial breathing space for those on low incomes. Help to buy equity loan mortgage rates can be competitive too, helping keep monthly payments to a minimum.
There are of course constraints, such as only being able to use the scheme to purchase a new build home, so it won’t be right for everyone. It’s important to remember that there are other options available for first-time buyers, such as 95% mortgages and guarantor mortgages, so it’s worth seeking expert advice to see if the Help to Buy scheme is right for you.
Help to Buy ISAsThe Help to Buy Individual Savings Account (ISA) helps people save towards their first home, by giving them a free cash boost from the government.
You can save an initial deposit of £1,200, followed by £200 a month in a Help to Buy ISA and the government will add another 25% to any contributions you make. So, for every £200 you save, the government will pay in £50. There's a limit to how much the government will put in though - the maximum bonus you can claim is £3,000. To earn this maximum amount, you need to save a total of £12,000 yourself.
When you're ready to buy a house, the government pays the bonus to your solicitor, who will add it to the money you are putting towards the purchase of your new home. You can combine the Help to Buy ISA with a Help to Buy Equity Loan if you want to.
Only first-time buyers are eligible for the Help to Buy ISA, and to qualify you must:
• need a mortgage
• live in the house you are buying yourself
• 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.
Find out more about Help to Buy ISA’s at www.helptobuy.gov.uk/help-to-buy-isa/how-does-it-work/
Scotland Help to Buy scheme
The Help to Buy (Scotland) Affordable New Build scheme is available for new build homes costing up to £230,000 for purchases which complete on or before the end of March 2017, £200,000 for purchases completed before the end of March 2018 and £175,000 for purchases before the end of March 2019.
The Scottish Government will provide an equity stake of up to a maximum of 15% of the value of the property, and you will need to contribute a deposit of around 5% of the property purchase price. Your mortgage and deposit combined must be at least 85% of the total purchase price. No interest is charged on the equity stake, which can be repaid at any time.
To qualify for the scheme, you must take out a mortgage from a lender participating in the scheme. The mortgage must be arranged on a repayment rather than interest-only basis, and must be for a minimum of 25% of the property price.
You won’t be eligible if you can afford to buy a home without the Government having an equity share in the property. You also won’t qualify if you’re buying alone and need a mortgage of more than 4.5 times your income, or 3.5 times your income if you’re buying as a couple.
Find out more about the Scottish scheme at www.gov.scot/htb
Wales Help to Buy SchemeIf you’re buying in Wales, you may be eligible for the Wales Help to Buy scheme. To qualify, you’ll need to have a 5% deposit, and be purchasing a new build property costing up to £300,000.
The Welsh Government will provide a shared equity loan for up to 20% of the property purchase price, and the remaining balance will need to be covered by a mortgage. You’ll only have to pay an admin fee of £1 a month for the equity loan for the first five years. After that, in the sixth year, you’ll be charged interest at 1.75% a year of the original equity loan amount. In subsequent years, the interest will increase by the same amount as the Retail Prices Index measure of inflation, plus 1%.
You can find out more at helptobuywales.co.uk
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