During the 2013 Budget report George Osborne introduced a new initiative to assist first time buyers and current home owners with their next property purchase. The new “Help to Buy” scheme was launched in April 2013 and gives current home owners and first buyers an alternative route to purchasing their next or first property. While a conventional mortgage is required this new scheme will provide an equity loan of 20% providing you are able to provide a cash deposit of 5%; this scheme is in place for properties up to the value of £600,000. Within this in-depth look at the new scheme which has seen over 7,000 home owners and first time buyers take advantage of its generosity.
How it works?
The overall concept of the “Help to Buy” scheme is fairly simple. However, for a first time buyer it can be slightly daunting. When entering this “Help to Buy: Equity Loaning” scheme there are three financial elements; a cash deposit, equity loan and mortgage.
For example, if you were to purchase a house worth £200,000 under this scheme you would require a cash deposit of £10,000 (5%). Then the government would provide an equity loan of £40,000 (20%) providing you are able to provide a mortgage worth £150,000 (75%). The mortgage is a conventional one of that which would likely be from a bank of some form; the government have no connection with the mortgage if you enter this scheme.
After you have owned the home for a five year period equity loan fees will be charged per year. In the first year you will have a fee of 1.75% of the initial loan value and for the continuing years the fee will increase matching the Retail Prices Index. These fees can be paid through monthly payments through your bank. No fees are charged for the payment process.
If you were to make payment in a large sum this is an option. The scheme offers you the ability to pay back lump sums of the equity loan of 10%, 20% or the full amount; this only applies if the initial loan is worth at least 10% of the property value.
Once the property is purchased by yourself it is in your name and it is possible for you to sell the property on; however, for you to sell the property on to another party the full equity loan must be paid. The loan can be paid back after the selling of the property; or at the end of the mortgage period.
According to the government this scheme has one aim; to make it easier for first time buyers and home owners stuck in their current living condition to be able to purchase a new house. And it does indeed do this. The scheme was launched in April and since then over 7,000 home owners and first time buyers have taken advantage of the scheme. The initial 20% loan offers great relief for many, and while you do have to pay it back it has less pressure than a full mortgage would. With this equity loan it is also thought to increase your chances of receiving a mortgage for the further 75% as banks will not only be providing less but also see that 25% has already been paid towards the house (including the 5% deposit).
As with all loans there is one huge disadvantage; it’s a loan. The money always has to be paid back. While you will be clear of any fees for the first 5 years they will begin in time and it is always vital that any person taking advantage of this scheme has financial stability for the foreseeable future; or at least till the full loan would have been paid out.
The increase in fees per year may also put further strain on some individuals who have taken advantage of this scheme. However, if you are financially stable throughout the payment period then the scheme should continue to be friendly.
One other element of this scheme that is vital to understand is that the government has no part in the conventional mortgage taken out (75%) as this is an agreement between yourself and the bank or loaner.
Who is eligible?
To be eligible for this scheme you must be a first time buyer or current home owner wishing to purchase a new home up to the value of £600,000. You must also be able to both pay an initial deposit for the property of 5% and also have a mortgage secured with 75% of the home’s value. However, in order to take advantage of the “Help to Buy” scheme you are not allowed to be purchasing the property with the intent to rent the property out at any point in the future.
How to enter the scheme?
In order to take advantage of this scheme you must contact a Help to Buy agent within your area; a list of which can be found on the Gov.uk website. At this point they will then provide further information about the scheme in your case and will also check your eligibility for this scheme. You should also note that this scheme is different in England and Scotland and different schemes are available within the How to Buy scheme.
Louisa Dearlove, Conveyancer