Help to Buy – how will it affect your mortgage?

Help to Buy is the new government scheme, announced in the March 2013 Budget, for the UK mortgage and property market. It is aimed at helping first time buyers – or those moving up the property ladder – who are finding it hard to save a big enough deposit.

There are two parts to the initiative, a ‘shared-equity scheme’ and a ‘mortgage guarantee scheme’. Both are designed to improve the accessibility and affordability of mortgages and are available to a wider audience than previous home ownership schemes. But how do they work?

The shared-equity scheme

This applies if you buy a ‘new build’ property to a maximum value of £600,000. All you need is a 5% deposit to be able to borrow a repayment mortgage from the government of up to 20% of the property value. This loan is interest-free for 5 years. The rest of the loan – 75% of the property value – comes from a mortgage lender. After the 5 year period, the interest on the government loan becomes 1.75%, rising annually by inflation plus 1%. You can repay this loan at any time with no early repayment charges.

The shared-equity scheme is available now and is scheduled to run for 3 years. It is only for residential purposes; second homes and buy to let investors are excluded from the scheme.

The mortgage guarantee scheme

From 1st January 2014, this scheme will support mortgages of up to 95% loan-to-value (LTV), for all property types up to the value of £600,000. If you have a deposit of 5% you will be able to get a 95% LTV mortgage from those lenders who decide to take part in the scheme.

The government has said that it will give lenders a guarantee of up to 15% of the mortgage to encourage them to lend high LTV loans to borrowers with small deposits. If the borrower fails to repay the loan, the government will be liable for a portion of the loss. Lenders will be required to pay a fee to get the guarantee and will also take a share of net losses. Lloyds Banking Group and Royal Bank of Scotland have already said that they will take part in the scheme; others such as Barclays, Santander, HSBC and Nationwide have said that they will wait until final details of the scheme are published later this year.

The mortgage guarantee scheme will be available from 1st January 2014 to everyone buying a property up to the value of £600,000, except for buy to let landlords.

So far the government has not excluded people from using the mortgage guarantee scheme to buy second homes. However, consultation with the mortgage industry will now take place and it is possible that some details will change before next January. This scheme is also planned to last for three years.

What should you do?

For more advice on getting a mortgage that makes use of the new shared-equity scheme – or for advice on how the mortgage guarantee scheme might affect your mortgage choices next year – get in touch with the mortgage specialists at Marchwood now.

Your property may be repossessed if you do not keep up repayments on your mortgage.