Up and Running

Let’s recap: earlier this year the Government introduced Help to Buy One, where they provide an equity loan to buyers looking to purchase a new build house. This loan was up to 20% loan to value, so effectively, you could buy a new home with a 5% personal cash deposit, and a 20% loan from the Government, and end up with a 75% LTV mortgage. So, not only were the rates better than at 95%, but the repayments would be lower and potentially more affordable. The equity loan is interest free for five years, so after 60 months you would be charged interest (although the rate is currently unknown). In practice, clients would then be encouraged to pay off the loan by re-mortgaging or selling and moving up the property ladder. (Refer to a further explanation of the Help-To-Buy scheme at the bottom of the page).

So with Help to Buy One the Government is attempting to stoke the housing market, and provide an incentive for house builders. The plan is open to both first time and next time buyers, up to a house value of £600,000, as long as the client will only own that house going forward (buy to let landlords need not apply please). My concern is about what happens in five years time if a client cannot afford a 95% mortgage (if their house has not increased in value); or, even worse, if the property has decreased in value and they are now in negative equity? How do they re-mortgage then? Clearly this is not an issue for people living in Fulham, but for the wider country it’s a very real danger. And then there’s Help to Buy Two, which is a mortgage guarantee scheme, rather than an equity loan. In phase two, the client borrows 95% from the lender, but the Government will guarantee the top 15%, mitigating some of the risk for a lender. If the house needs to be repossessed then it doesn’t matter to the lender if the property is now in negative equity, as an insurer will pay out to cover the lender’s loss.

“The client borrows 95% from the lender, but the Government will guarantee the top 15%, mitigating a good proportion of risk for the mortgage companies.”

So how does this help the person on the street with a 5% deposit burning a hole in their pocket? Well, in theory, lenders should offer slightly better rates with more achievable criteria and credit scoring.

Help to Buy Two is generally a better idea than the first phase, as the Government does not have to put money in straight away, while clients are assessed on affordability for a 95% deal now, and not a 75% one with the risk of problems mounting in five years time.

“So how does this help the person on the street with a 5% deposit burning a hole in their pocket?”

But are we really going to see a reduction in rates and looser criteria? Well it is an encouraging start, even with just two lenders offering rates (at time of writing). Both NatWest and Halifax have committed to the scheme, and their products are certainly better value compared to current options at 95%. NatWest offer a two year fixed at 4.99% at 95% LTV, with no product fee, while Hanley Economic, for example, have a two year deal at a higher rate of 5.89%, with a £350 product fee.

However, my advice is that if you’re buying, buy now, because prices are moving up and Help to Buy Two is only going to push them higher. Before long, even 5% might be out of reach for potential buyers. But I suspect that will be a problem for the next Government, so not one the incumbent is that concerned about. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. Rates correct at time of print.

Words:
Alistair Hargreaves
Mortgage Consultant, John Charcol

THE HELP TO BUY SCHEME EXPLAINED

There are two parts to the scheme, Help to Buy 1
(Equity Loans) and Help to Buy 2 (Mortgage Guarantees).

How do I qualify?
- You must have a deposit of at least 5%;
- Be looking to buy a home worth £600,000 or less;
- You must live in the home you purchase

HELP TO BUY 1
The Equity Loans Scheme (New Builds)
This is only available on New Build properties.

How it works
- You’ll need a deposit of at least 5%;
- The government lends you up to 20% of the property’s value as an equity loan
- You’ll need to get a mortgage of up to 75% of the property’s value

What do I have to pay back?
- Interest free for the first five years
- From sixth year onwards you will pay an admin fee
- The admin fee will start at 1.75% of the loan
- The admin fee will increase every year by any increase in the Retail Prices Index plus 1%.
- You can choose to repay part of the loan early in chunks of either 10% or 20% of the total value.
- You’ll pay back the percentage you borrowed from the government of the value of your home when you sell it:

HELP TO BUY 2
The Mortgage Guarantee Scheme
This is essentially government supported mortgages so lenders are more comfortable lending up to 95%.

How it works
- You put down a deposit of 5%.
- You borrow 95% of the property’s price from a lender who has signed up to the scheme.
- The Government guarantees the top 15% of the mortgage, in theory making borrowing cheaper.