Guide type: Help-to-Buy
10 August 2016
Photo Credit: www.rhfunding.com
If you are just starting to consider applying for a Help to Buy scheme, it can be difficult to know where to start and to know which scheme is best suited for you.
There are a couple of ways in which the government’s Help to Buy scheme can be used, so let’s break it down into bitesize chunks:
First introduced in April 2013, the Help to Buy Equity Loan allows buyers to secure a property with just a 5% deposit, while the government will loan up to 20% of the value of the property. The remaining 75% can be borrowed by a mortgage lender and be repaid after 25 years, or when you come to sell your property. For example, if you wanted to purchase a property valued at £200,000, you could put down a 5% deposit of £10,000 and then get a 20% Equity Loan of £40,000. The outstanding £150,000 can then be obtained by a mortgage lender. You have 25 years to pay back the Equity Loan; it can be paid back as a lump sum or in instalments over time. The Help to Buy Equity Loan is restricted to new-build properties only, which must have a maximum value of £600,000.
The second scheme, launched in 2013 and finished in December 2016, is the Help to Buy Mortgage Guarantee; this system was purposefully designed to help both first-time buyers and those who are looking to move home and move up the property ladder. This scheme was meant for purchasers who had the means to finance mortgage payments but needed some assistance raising a deposit.
With the Help to Buy Mortgage Guarantee, purchasers could pay a deposit between 5% and 20% or the property price, depending on what they could afford, and the outstanding percentage of the purchase price was then provided by a mortgage lender. The mortgage lender verified with the government that the buyer could make the mortgage settlements, which the government then approved and even guaranteed the lender up to 15% of the purchase price.
Unlike the Equity Loan, the Help to Buy Mortgage Guarantee was not restricted to just new-build properties, but the value of the property could still not exceed the £600,000 mark.
Another option available solely to first-time buyers looking to save a deposit for a first home is to open up a Help to Buy ISA. Since being introduced in December 2015, over half a million people have opened a Help to Buy ISA, which proves that this scheme should not be a second thought for first-time buyers. With this account, every £200 that you manage to save will result in the government giving you an additional £50 for free. The most you can receive from the government is £3,000, but if you are saving to buy with a partner who also has an ISA account, ultimately you could get £6,000 from the government to add to your deposit for your first home together.
However, there are a few restrictions when it comes to opening up a Help to Buy ISA that must be complied with. You cannot open a Help to Buy ISA if you are under the age of 16 and the home that you wish to purchase must be valued at £250,000 or under, however for a property in London it must be £450,000 or under.
Another great thing about the Help to Buy ISA is that you are free to find a mortgage arrangement that suits you and you do not necessarily have to use a Help to Buy mortgage scheme. As with the other Help to Buy schemes mentioned earlier, the property that you purchase with the money saved in your Help to Buy ISA must be one that you are going to live in and not one that you plan to rent out, nor can it be used to purchase a property out of the country.
The approach for Shared Ownership is quite direct and a great option for those struggling to buy a property. Shared Ownership is a scheme that is provided by various housing associations. You are an eligible applicant for Shared Ownership if your household receives an annual salary of £80,000 or less, or £90,000 if you are a London resident.
When using the Shared Ownership scheme, buyers purchase a percentage of a property, usually between 25% and 75%, and then pay rent on the remaining percentage of the property. Therefore, purchasers only need to pay the mortgage and save a deposit for the percentage of the property that they are buying.
After purchasing a share in the property, it is possible to undergo ‘staircasing’, which is a process that allows buyers to purchase a larger share in their home. The value of the share will vary depending on whether the price of the property has increased or decreased since the purchasers bought their share. In many cases, some housing associations will allow for purchasers to staircase up to three times and others will only let purchasers staircase to a certain extent if they have the intention to take full ownership of a property.
Following the impressive success rate of the Help to Buy scheme, the government introduced the London Help to Buy in Febuary 2016. This scheme allows first-time buyers looking to secure a home in the city to borrow up to 40% of the price of the property they hope to purchase. Benefits of this scheme include no age restrictions in addition to being interest-free for the first five years.
For further information on the London Help to Buy Scheme, please click here read our full guide.