Last updated: 23/07/2020 | Estimated Reading Time: 5 minutes
Help to buy mortgages
The government’s help to buy scheme is there to help people get onto the property ladder in the face of insufficient wages and steadily increasing house prices.
In This Guide:
- What is help to buy?
- Help to buy: Equity loans
- Help to buy: Mortgage guarantee
- Who qualifies for help to buy?
- Compare mortgage quotes online
What is help to buy?
Help to buy is a scheme available for first-time buyers and movers into new-build properties designed to help them purchase, or at least to get a mortgage on any qualifying home worth up to £600,000. Help to buy is only available in England at the moment, but there are similar schemes for those in Wales and Scotland available.
The basic aim of help to buy is to allow first-time buyers to either purchase outright a new-build property, or to get a mortgage on an existing property, with a deposit of only 5% of the total property value.
There are two aspects or phases to help to buy:
- Equity Loans, and
- Mortgage Guarantee
Help to buy: Equity loans
With home to buy equity loans, the government will offer the prospective home-owner a loan of 20% of the property value, meaning that with a deposit of just 5%, they can then take out a mortgage worth 75% of the price of the house.
So if the property is worth £300,000 then:
The government loan amounts to £60,000 (20%)
The buyer pays a cash deposit of £15,000 (5%)
The remaining £225,000 (75%) is taken out as a mortgage loan.
The main benefit of the help to buy equity loan is that no loan fees are charged for the first five years. During the sixth year, you will be charged 1.75% of the loan value and in subsequent years, fees will increase regularly following, but staying 1% higher than, the Retail Price Index.
You’ll need to pay back the loan either within 25 years or when you sell the property.
If you sell the property you’ll pay back the same percentage of the market value at the time as you borrowed initially.
So if you borrowed £50,000, as 20% of £250,000 and then sold the property for £300,000, you’ll pay back 20% of the sale amount, totalling £60,000.
You can also choose to pay the loan back early if you wish to.
Help to buy: Mortgage guarantee
With a help to buy mortgage guarantee, the government does not provide the buyer with an equity loan, but rather guarantees the mortgage lender 15% of the borrowed value so that they can offer the prospective buyer a loan with a 95% LTV ratio with far less risk involved than there would be otherwise.
The LTV (loan-to-value) ratio of a mortgage is simply the ratio between the amount borrowed and the value of the property 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 what you pay as a deposit.
Low LTV mortgages (80% or under) are considered lower risk and are offered more readily with better interest rates than those with a higher ratio. This is where the home to buy mortgage guarantee comes in, reducing the risk on the part of the lender by guaranteeing them 15% of the loan value.
Who qualifies for help to buy?
The requirements for both help to buy schemes are relatively similar, but the important different is that the availability of the help to buy mortgage guarantee, unlike the equity loan, is not restricted to first-time buyers.
In order to qualify for a home to buy equity loan, you’ll need to fit 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
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.
If you don’t qualify for either help to buy scheme for whatever reason, or if you simply don’t think it’s the best option for you, there are alternative programs available that offer a helping hand when it comes to buying a property.
Under a shared ownership scheme, you can purchase a certain percentage of the property (usually worked out in 25% increments) and then pay to 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 is a scheme that works very similarly to help to buy, allowing you to get the property with only a 5% deposit but is only available on certain newly-built properties.
Available for buyers in Wales, the homebuy scheme offers a 30% equity loan, larger than that offered under help to buy, but is generally targeted at those who, without it, would require social or council housing.
Compare mortgage quotes online
If you do qualify for help to buy, you’ll need to inform your mortgage provider so that 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.