How can Help to Buy help you?

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Written by: Christina Hoghton
16/02/2016
Since the launch of Help to Buy London, the government now has four schemes under the Help to Buy umbrella - all designed to improve access to homeownership.

So how do the schemes work?

Help to Buy ISA

Launched in December 2015 the Help to Buy ISA (which stands for Individual Savings Account) is a scheme for those saving a deposit for their first home.

If you are over 16 years old and save money into a Help to Buy ISA the government will boost your savings by 25%. For every £200 you save, you will receive a government bonus of £50.

The Help to Buy ISA is available from a range of banks and building societies until 30 November 2019.

You are only allowed to save up to £200 a month in your Help to Buy ISA although to boost your account, in your first month, you can save a lump sum of up to £1,200. The maximum government bonus you can receive is £3,000 – to receive that, you need to have saved £12,000.

Over a dozen providers offer the Help to Buy ISA including the main banks. Halifax currently offers the highest rate of interest on your savings at four per cent.

The Help to Buy ISA is very new so it is too early to judge its effectiveness. However Nationwide announced in December than over 7,000 people opened its Help to Buy ISA in the first week alone, which shows a high level of interest.

Help to Buy Mortgage Guarantee

The Help to Buy mortgage guarantee scheme is a type of mortgage backed by the government. It works in exactly the same way as any other mortgage except that under the scheme the government offers lenders the option to purchase a guarantee on mortgage loans.

Because of this support, lenders taking part are able to offer more high-loan-to-value (LTV) mortgages (80% to 95% of the property’s value) to buyers with small deposits.

In every other regard it is like any other mortgage so you are still fully responsible for your mortgage repayments. If you have a five per cent deposit, you will need to take out and pay back a 95% LTV mortgage.

Your lender will check that you can afford the mortgage and that you do not have a history of payment difficulties.

Other eligibility requirements include:

  • You don’t need to be a first-time buyer, but you are not allowed to own any property elsewhere in the world
  • The property you are purchasing could be an existing or new-build home in the UK, priced up to £600,000
  • You can’t let out the property to somebody else
  • The size of the mortgage you apply for must be less than 4.5 times your income.

The Help to Buy mortgage guarantee scheme will run for three years until 31 December 2016 and around a dozen lenders are signed up to the scheme.

Financial information provider Moneyfacts has stated that, since its introduction, the scheme has had a profound effect on the 95% LTV mortgage market, for those with just a five per cent deposit, giving it a significant boost at a vital time.

The number of mortgages at 95 per cent LTV has risen from 56 in October 2013 to 249 today – a 444% increase. The interest rates charged on these high LTV deals have also fallen as a result, with two-year fixed rates dropping from 5.74% in October 2013 to 4.33% in January 2016.

Help to Buy Equity Loan

This scheme is very different to the Help to Buy mortgage guarantee scheme, and it’s only available to those buying a newly-built property.

With a Help to Buy equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a five per cent cash deposit and a 75% LTV mortgage to make up the rest.

You won’t be charged loan fees on the 20% loan for the first five years of owning your home, after which you are changed 1.75%.

The way Help to Buy loans work means that you could end up paying back more or less than you borrowed, depending on whether your home rises or falls in value.

For example, if you take a 20% equity loan to buy a property worth £200,000, that loan is £40,000. But if the property has risen in value to £250,000 when you come to sell it, you still need to repay the government its 20% stake, which has now risen to £50,000.

Equity loans are available to first-time buyers and home movers buying a newly-built home in England up to £600,000.

Help to Buy London

The new Help to Buy London scheme launched in February 2016. It’s exactly the same as the Help to Buy Equity Loan scheme except that the government will increase the upper limit for the equity loan it gives new buyers within Greater London from 20% to 40% of the property’s value.

You’ll still need to contribute at least 5% of the property price as a deposit, the Government will give you a loan for up to 40% of the price, and you’ll need a mortgage of up to 55% LTV to cover the rest.

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