What is Help to Buy?

05/09/2018

Buying a home is for most people one of the biggest life decisions and the government’s Help to Buy scheme is a popular way of getting on the property ladder. It can be a both exciting and stressful time when going through the property purchasing process. For many, concerns of saving for a deposit tops the list when it comes to the property buying process’ top concerns. Also, as in the case of a second charge mortgage, the process is quite detailed and requires a degree of patience.

However, Help to Buy is one of various government funded and backed schemes that are aimed at helping people get onto the property ladder. The scheme can help you get on track to purchasing your first home. For many first-time buyers, particularly young first-time buyers who are also at the starting end of their careers, Help to Buy could be the key to a new property.

It is important to remember that The Help to Buy scheme is only available in England. Nevertheless there are similar home buying schemes provided by the Scottish and Welsh Governments as well as the Northern Ireland Housing Executive.

The Help to Buy Scheme

The Help to Buy scheme was launched in 2013 and helps both first-time buyers and existing homeowners to move property affordably. It is important to note this scheme is restricted to new build properties only. Whilst it is typical for people to save for a deposit that is equivalent to 20% of a property’s value, the Help to Buy scheme works differently. Those who are eligible may only need to fund as little as 5% of the property’s value as a deposit instead. 

How Does Help to Buy Work?

The Help to Buy scheme works by the government lending first-time buyers up to 20% of the cost of the property through an equity loan. This is the reason why only a 5% deposit is needed. The rest of the amount becomes a mortgage equating to 75%. Furthermore, under the Help to Buy scheme, you also will not have to worry about paying interest on the 20% loan for the property for the first five years. This means that you are likely to receive better mortgage rates as you will not be borrowing the full 100% from a mortgage lender.

For London dwellers, the Help to Buy scheme works slightly differently reflecting the higher housing costs in the capital. Buyers in London will have the maximum they can borrow from the government increased to 40%.

Also available, is the Help to Buy ISA scheme. This is specifically for first-time buyers and provides those buying their very first home an additional bonus from the government. For example, if prospective buyers save £200 each month, the government will then provide an additional £50, with this amount capped at £3,000 altogether. This means that you could end up increasing your ISA savings in order to get on the property ladder from £12,000 to £15,000, via the government topping up your savings by 25%.

In addition, there is also the Help to Buy Shared Ownership scheme. This scheme allows you to buy a share of your property, then paying a reduced amount of rent on those shares that you do not yet own in instalments until they are all paid off. In time, the person in question pays off enough equity to potentially own a larger share of the property or even the property in its entirety.

Who Qualifies for the Help to Buy Scheme?

In order to qualify for the Help to Buy scheme, you will need to meet various criteria, set out by the GOV.UK website:

●      You will need a deposit of at least five percent

●      It must be your only residence, you cannot buy-to-let an existing house and purchase another under this scheme and the scheme cannot be used to help property owners in buying and selling properties for profit

●      The maximum purchase price is £600,000

●      Buyers must take out a first charge mortgage under the scheme

●      Outside of London, buyers will need to get funding for 80% of their property via a mortgage and deposit

●      Buyers in London will need to be able to fund 60% of the property through a mortgage and deposit

What Are the Costs Involved with the Help to Buy Scheme?

The equity loans provided as part of the Help to Buy scheme remain interest-free for the first five years. Thereafter, you will start to pay interest at a rate of 1.75%. If the Retail Price Index increases so will interest, plus an additional 1%. It is therefore important to account for this prior to taking out a Help to Buy mortgage so you do not fall short.

You will need to make sure that you have paid the equity loan (equal to the market value of the loan at the current time) in full after 25 years.

Alternatively, it may be repaid by the borrower selling the property or when the mortgage term has finished. It is possible that depending on whether your property increases or decreases in market value, you may end up paying back more or less than you initially borrowed.

If you are financially able to mark voluntary repayments, it is possible to do so under the Help to Buy scheme. There is a minimum amount that needs to be paid when it comes to voluntary payments, which is 10% of the property’s market value.

Additional Costs to Consider

As well as the equity loan that needs to be repaid, there will also be other costs you will need to take care of when it comes to buying a home such as:

●      Administration fees under the Help to Buy scheme of £1 per month from the start of the loan until it is repaid

●      Removal costs

●      Solicitor’s fees

●      Furnishing and decorating costs

●      Valuation fees

●      Buildings insurance

●      Stamp duty (you can use stamp duty calculators available online to estimate how much you would pay). Remember that as a result of the autumn budget last year first-time buyers are exempt from paying Stamp Duty on the first £300,000 up to the value of £500,000

●      Surveying costs

●      Arrangement fees

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

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