What is Help to Buy?
Help to Buy is a scheme for first-time buyers and those moving into new-build properties, designed to help them purchase or secure a mortgage on a home worth up to £600,000. Help to Buy is currently only available in England, though similar schemes exist in Wales and Scotland.
The basic aim of Help to Buy is to allow first-time buyers to either purchase a new-build property outright or secure a mortgage on an existing property with a deposit of only 5%.
There are two aspects or phases to Help to Buy:
Equity Loans, and
Mortgage Guarantee
Help to buy: Equity loans
With Help to Buy equity loans, the government will offer the prospective homeowner a loan of 20% of the property value, meaning that with a deposit of just 5%, they can take out a mortgage worth 75% of the property's price.
So, if the property is worth £300,000, then:
The government loan is £60,000 (20%).
The buyer pays a £15,000 cash deposit (5%).
The remaining £225,000 (75%) is financed through a mortgage.
The main benefit of the Help to Buy equity loan is that no fees are charged for the first five years. In the sixth year, you’ll be charged 1.75% of the loan value, and in subsequent years, fees will increase by 1% above the Retail Price Index.
You must repay the loan either within 25 years or when you sell the property.
If you sell the property, you'll repay the same percentage of the market value at the time as you borrowed initially.
For example, if you borrowed £50,000 (20% of £250,000) and sold the property for £300,000, you'll repay 20% of the sale price, totalling £60,000.
You can also repay the loan early if you wish.
Help to Buy: Mortgage guarantee
With a Help to Buy mortgage guarantee, the government does not provide an equity loan. Instead, it guarantees 15% of the borrowed value to the mortgage lender, enabling them to offer the prospective buyer a 95% LTV loan with less risk than there would otherwise be.
The LTV (loan-to-value) ratio of a mortgage is the ratio between the amount borrowed and the property value, expressed as a percentage.
So, if the property is worth £100,000 and you need to borrow £80,000, your LTV is 80%. The remaining 20% (£20,000) is your deposit.
Low LTV mortgages (80% or lower) are considered lower risk and typically offer better interest rates than higher LTV mortgages. This is where the Help to Buy mortgage guarantee comes in, reducing the risk for the lender by guaranteeing 15% of the loan value.
Who qualifies for Help to Buy?
The requirements for both Help to Buy schemes are similar, but the key difference is that the availability of the Hep to Buy mortgage guarantee, unlike the equity loan, is not restricted to first-time buyers.
Equity loans policy
In order to qualify for a Help to Buy equity loan, you’ll need to meet the following criteria:
You need to be a first-time buyer
You must live in England
You’ll need to provide 5% of the property value to put down as a deposit
The property in question must not be worth more than £600,000 and must be a new-build
You need to have a clean credit history to be able to prove that you can afford the loan repayments
Mortgage guarantee policy
In order to qualify for a home to buy mortgage guarantee, you’ll need to fit the following criteria:
You must live in England
The property in question must not be worth more than £600,000
The property in question cannot be your second home
You will still need a clean credit history.
Of course, individual mortgage providers will impose certain restrictions or conditions on those applying for 95% LTV loans guaranteed under the Help to Buy scheme, but these are the basic conditions set by the government.
Alternatives
If you don’t qualify for either Help to Buy scheme for whatever reason, or if you don’t think it’s the best option, there are alternative programs available to help you buy a property.
Shared ownership
Under a shared ownership scheme, you can buy a percentage of the property (usually in 25% increments) and rent the remainder from a housing association.
You can gradually increase the percentage you own through a process known as ‘staircasing’.
Shared ownership, unlike Help to Buy, is available to buyers in Scotland.
NewBuy scheme
NewBuy is a scheme similar to Help to Buy, allowing you to purchase property with only a 5% deposit, but it’s available only on certain newly-built properties.
Homebuy scheme
Available for buyers in Wales, the Homebuy scheme offers a 30% equity loan, larger than the one offered under Help to Buy, and is generally targeted at those who would otherwise require social or council housing.
Compare mortgage quotes online
If you qualify for Help to Buy, you’ll need to inform your mortgage provider so they can tailor the loans they offer to suit your situation.
By comparing quotes using our mortgage comparison tool, you’ll have your pick of the best and cheapest loans on the market.