The most recent budget saw the announcement of the Chancellor’s Help to Buy Scheme which will benefit buyers, particularly first time buyers, purchasing either new build property or established residential homes.

The government wants to help more people across the country make the aspiration of home ownership a reality.  Help to Buy is aimed at increasing the supply of low-deposit mortgages as well as new housing.  If the schemes take off no doubt the increased activity in the property market should provide a vital boost to what has been a poor economy for some time.

Help to Buy is made up of two schemes

• “equity loan” where the government will loan you up to 20% of the value of your new build home; and;
• “mortgage guarantee” where lenders will be incentivised to make more mortgages available for people with small deposits.

Help to Buy – Equity Loan Scheme

If you have a 5% deposit and want to buy a new build home, you’ll be able to access the Help to Buy: equity loan scheme from 1st April 2013 through participating housebuilders and HomeBuy agents.

Subject to meeting the eligibility criteria and affordability checks, you’ll be able to use either Help to Buy scheme to purchase a property with a value up to £600,000.

The government will provide buyers with an equity loan of up to 20% of the value of a new build property. The loan is interest-free for the first five years. From year six a fee of 1.75% is payable on the equity loan, which rises annually by RPI inflation plus 1%.

The equity loan can be repaid at any time within 25 years (or the term of the mortgage), or on sale of the property.

Help to Buy is only available on capital repayment mortgages and will only be available on properties which are to be occupied by the individual or individuals taking out the mortgage.  Therefore this scheme cannot be used in conjunction with Buy to Let purchases which falls outside the reasons why the scheme has been created.

Help to Buy – Mortgage Guarantee

Buyers wanting to purchase an existing property may be interested in the Help to Buy: mortgage guarantee.

If you want to buy a property which is either new build or an existing property, the Help to Buy: mortgage guarantee will be available from January 2014.  The government will provide further details about the scheme later in the year.

Subject to the final scheme design, the government will make available £12bn of guarantees to lenders which will be sufficient to support £130 billion of high loan to value mortgages. The purpose of the scheme is to increase the availability of mortgages for buyers with small deposits.

The government will provide lenders with the option to purchase a guarantee on the high loan-to-value portion of the mortgage. This guarantee will incentivise lenders to offer a greater number of mortgages to buyers with small deposits although lenders may choose whether to use the guarantee or not.

Under Help to Buy: mortgage guarantee, the government will provide guarantees to lenders on a proportion of the mortgage. If a borrower’s property is repossessed, the government will cover a proportion of the losses suffered by lenders.

The mortgage guarantee will be available on all residential properties in the UK, both new-build and existing properties, up to a value of £600,000 but will only be available to buyers with deposits between 5% and 20%. Mortgages are already widely available for those with a deposit of 20% or more.

Interest rates on products supported by Help to Buy: mortgage guarantee will be set by lenders. The government will not be involved in setting the price, which is a commercial decision for individual lenders.

For both schemes, borrowers will need to meet appropriate tests to ensure they can pay back the mortgage, as well as passing their chosen lender’s credit and affordability checks.

Both schemes are available to home movers as well as first-time-buyers, subject to meeting the relevant eligibility criteria.

There are however reasons to be cautious.  You pay a premium for a new home but this value is lost as soon as you move in, much like a new car loses value as soon as you drive it off the showroom forecourt.  Selling a modern house that is 10 years old can be more difficult since it has lost all the advantages of being new and the period under any initial build warranty has expired.

Critics of the scheme also believe an increased demand for new-builds could create a bubble where prices climb during the scheme’s 3 years but then fall when it ends.

The Help to Buy equity loan cannot be transferred to a new home – it must be repaid on the sale of the property at 20% of the current market value.  Accordingly, house price falls could easily and quickly wipe out any buyers initial 5% deposit outlay and in the worst case scenario leave you with little or no equity at all.

For further advice on the Help to Buy scheme, please contact Liz Wallis or phone us on 01484 538421 and ask to speak to a member of the Residential Property team.