Help to Buy V. 95% Mortgages
The Government launched the Help to Buy scheme in April 2013 as a means of giving first-time buyers a leg-up onto the property ladder. The latest version of Help to Buy is the Help to Buy: Equity Loan which offers aspiring homeowners the chance to buy a new-build property with as little as a 5% deposit, subject to eligibility, terms and conditions. The government equity loan, which lends up to 20% of purchase price, increasing to 40% in London, boosts the initial deposit from 5% to 45% in London and 25% everywhere else.
This process therefore brings the LTV (loan-to-value) ratio down from 95% to 75% (55% in London), meaning that first-time buyers will borrow less money on their first mortgage. By borrowing less money, the monthly mortgage payments will be lower, giving first-time buyers the opportunity to keep their monthly financial commitments at a more affordable level.
So, how do the monthly payments of a standard 95% mortgage compare with the monthly payments of a Help to Buy mortgage, factoring in the Government Equity Loan? We’ve teamed up with Hiten Ganatra, Managing Director at Visionary Finance to bring you some details.
Regardless of which of the two options you take, first-time buyers will need a minimum of a 5% deposit.
The team at Visionary Finance have mocked up an example to show the difference in monthly payments. Using a Galliard new-build property outside of London* with a property price of £300,000, the example figures in the table below highlight the cash deposit required, the impact of the Government Equity Loan and the initial monthly mortgage payments on a two-year fixed-rate product.
If a buyer was to purchase a property using a traditional 95% mortgage, the best mortgage rate available for a two-year fixed-rate deal is 3.89%**. However, if the buyer were to use the Help to Buy Equity Loan scheme, which still only requires the 5% cash deposit plus the boost of the 20% Government loan making a 25% deposit, the purchaser can borrow at a rate of around 1.39%**, also fixed for two years.
|Traditional Mortgage||Help to Buy Mortgage|
|Client Deposit (5%)||£15,000||£15,000|
|Government Equity Loan||£0||£60,000|
|Interest Rate Payable||3.89%||1.39%|
|Monthly Mortgage Cost||£1,502.65||£892.99|
The above example is based on a 25-year repayment mortgage.
According to Hiten Ganatra, Managing Director at Visionary Finance:
“The disparity in mortgage interest rates between a traditional 95% mortgage versus a Help to Buy mortgage is huge. The affordability for a first-time buyer can be vastly improved if they do consider the Help to Buy Equity Loan scheme.”
Government Equity Loan
So, how does the Government Equity Loan work? For first-time buyers purchasing a new home, the Government will provide a loan of up to 20% of the value of the home to boost the initial deposit amount and reduce the required borrowing on a mortgage. For the first five years of the loan agreement first-time buyers are not required to make any repayment on the loan, nor is there any interest accrued on the loan. After five years, repayments of the loan are due along with interest at an initial rate of 1.75%. Interest payments on the Government Equity Loan will then increase in line with RPI (Retail Prices Index) inflation.
The Help to Buy: Equity Loan is an excellent way for first-time buyers to get on the property ladder. It enables first-time buyers to purchase a new-build property without the burden of acquiring a significant deposit.
For more information about Help to Buy mortgages, contact the Help to Buy Team at Visionary Finance.
*For first-time buyers purchasing a property in London, the Government can provide a loan of up to 40% of the price of a new home; for more information, take a look at our guide to the London Help to Buy scheme.
**Rates correct at the time of printing.