Help to Buy – what happens next?

10,000 new buyers in just 4 months

Help to Buy is the Government scheme, announced in the March 2013 Budget, for the UK mortgage and property market. It is aimed at helping home buyers who are finding it hard to save a big enough deposit. In the first 4 months from its launch in April 2013 the first part of the scheme assisted 10,000 buyers to make reservations on new build homes, boosting the mortgage market and the house building sector. Parents with grown up children at home are finding that, for the first time in years, their offspring can seriously consider moving out to buy their first place.

A further boost to house prices?

Data published by the Council of Mortgage Lenders shows that lending to first time buyers in the second quarter of 2013 was at its highest quarterly total since 2007. This has led to some industry experts calling on the Government to drop the second part of Help to Buy, warning that the £12 billion mortgage lending part of the scheme, due to be launched in January next year, will boost demand for housing even more without increasing supply and so prices will be artificially inflated.

Government commitment to Help To Buy Part 2

However, it is mostly first time buyers who have been helped so far to buy new build starter homes. Thousands of people are still ‘trapped’ in family homes that are now too small to meet their needs and so they are having to extend their property rather than move. These are the people who have yet to be helped up the ‘second-hand property’ ladder, thus unlocking pent-up demand across the whole housing market. George Osborne has said recently that he is still committed to introducing ‘Help to Buy Part 2’ because it is the next piece of the jigsaw aimed at returning the UK economy to prosperity (thereby returning the Conservative Party to Government at the next General Election).

What is Help to Buy exactly and how could it work for you?

There are two parts to the initiative, an ‘equity loan’ and a ‘mortgage guarantee’. 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 equity loan

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 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

From 1st January 2014, planned to run for 3 years, this scheme will support mortgages of up to 95% loan-to-value (LTV), for all property types (new build and ‘second-hand’ property) 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 will look to provide £12billion in guarantees, which could enable up to £130billion in higher loan-to-value mortgages (subject to the final scheme design).

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. So far the Lloyds Banking Group is the only lender that has confirmed that it 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 agreed.

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 January.

What should you do?

For more advice on getting a mortgage that makes use of the equity loan – or for advice on how the mortgage guarantee 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.