The facts Every Homebuyer Should Know About Help to Buy Schemes
Buying a property is a dream for many people. Home ownership has always been a challenge to achieve, but it has arguably become even more difficult in recent times. Stricter affordability rules came in a few years ago under the MMR ruling. These rules mean you must now have proof you can afford not only the current monthly payments, but larger ones too if interest rates were to go up.
Meanwhile, wages have failed to rise anywhere near the same rate as house prices. That is good news for those who already own a property, but not so good for those looking to own one for the first time in their lives. It is also one of the reasons why the government brought in the Help to Buy scheme. It recognised that for many people, home ownership will never be more than a dream. Expensive rental prices have also made it difficult to save up for a deposit.
Here, we explore the ins and outs of Help to Buy – what it is, what to expect, and whether it could be right for you.
What is Help to Buy?
The name covers the specific government-run schemes designed to assist people in buying their own home. Other available schemes / concepts to consider are:
- Help to Buy: ISA
- Shared Ownership
- Equity Loan
- London Help to Buy
We will focus on each of these schemes below, so you can see which one is most suited to your situation.
Help to Buy: ISA
This is perfect if you are putting money away for a deposit on your first home. Instead of saving it into a regular savings account, which will likely only pay a small amount of interest, you can put it into a Help to Buy: ISA. This account is designed to give you a 25% boost to your savings. That is far healthier than any savings account will provide.
There are conditions attached to the account. Firstly, you can deposit a maximum of £1,200 to get the account started. A monthly contribution of up to £200 can be put away towards your deposit. The account also stipulates a minimum of £1,600 should be added to the account before your first bonus is added. The bonus on that amount would be £400, as per the 25% offer.
The maximum bonus you can earn from this account is £3,000. You would need to put away £12,000 to qualify for the maximum £3,000 boost to your savings. That would take you to a tidy sum of £15,000 to use as a deposit on your first home.
One perk worth mentioning that concerns this offer is that couples can receive up to £6,000 via the ISA. That’s because each person is permitted to open a separate account. So, if you and your partner both open this ISA, you can each receive up to the £3,000 maximum.
You can only use this on properties up to a certain purchase price – £250k on standard or £450k on HTB London
This scheme is available in England and aims to help those who cannot get a home loan on a property. For example, a property may cost £250,000 to purchase but you can only be accepted for a mortgage of, say, £200,000. If you are in a similar situation, this scheme may be for you.
The idea is that you would buy a share of the property. If you can get a mortgage worth between 25% and 75% of the total value of the property you wish to buy, the Shared Ownership scheme will allow you to rent the remainder of the property. This gives you the chance to buy the remaining portion of the property later if you can afford to do so.
London residents must have an income of under £90k a year to qualify, while people living anywhere else in England must earn less than £80k a year. As such, many people would qualify for assistance under this scheme. First-time buyers, those who have owned a property in the past but can no longer afford to, and those who already own a Shared Ownership property can all qualify.
If the idea of owning and renting simultaneously doesn’t appeal, perhaps the Equity Loan would be a better option for you. This loan is designed to make it easier to afford a property purchase. It breaks into three elements:
- You provide a deposit of 5% in cash – from your own savings or a family gift
- You obtain a mortgage for 75% of the cost of the property
- The government contributes an equity loan for the remaining 20%
If you wanted to purchase a property worth £250,000, the 5% cash deposit would be £12,500. You would then need a mortgage to cover the remaining £237,500. However, you may only be able to get a mortgage for £200,000. In ordinary circumstances, you would not be able to buy that property.
This Equity Loan scheme means you would only need a mortgage for £187,500. You would still need to stump up the £12,500 deposit, but the government would provide the other £50,000 as a loan. You could borrow less than this as part of the scheme; 20% is the maximum the government will provide. The best part of this is that you will pay no fees on the loan for five years. In the first year following that, the interest is set at just 1.75%. From the seventh year onwards it is 1.75% plus RPI plus 1%. As such, it provides a competitive rate for the loan when compared to a traditional mortgage.
London Help to Buy
Property prices in the city are far higher than they are anywhere else in the country. This means trying to buy a property in London is a lot more difficult. As such, the Equity Loan scheme allows Londoners to ask for a bigger equity loan than those living outside the capital. The usual upper limit for this loan is 20%. However, if you live and wish to buy a property in London, you can claim up to 40% of the value of the property as a loan from the government. That equates to getting a mortgage of a minimum of 55% of the price of the home, along with your 5% deposit.
How do I qualify for Help to Buy?
Once you know a little about the scheme, you may want to consider your eligibility. Not everyone will qualify, so it is important to consider and understand your position before looking into it in more detail.
As you can see from the information given above, the different options available work in slightly different ways. However, there are two elements that are common to them all:
- You must be able to provide at least a 5% deposit towards the cost of your new home
- You must also be able to apply and be accepted for a mortgage
The value of that mortgage will depend on various factors – how much you earn, what you can afford now, and what you can afford to pay in future if interest rates go up. It is wise to cut back on outgoings and to make sure your finances are in good shape before you apply. It could make all the difference.
Can I get Help to Buy?
Some people believe this scheme is only designed to help people get on the housing ladder for the first time. However, the Equity Loan option is available for those who wish to move up the ladder as well as first-time buyers. While household income may count you out of using the Shared Ownership option, it would not count you out of using the Equity Loan scheme.
If you wish to know more, the best bet is to read about all forms of the scheme. You can then see which ones you are eligible for and which one might work for you.
According to the FAQs on the government website covering the scheme, all properties inside the UK qualify that are worth a maximum of £250,000. You must be able to confirm this will be your only property and will be the one you live in, i.e. you cannot buy it and rent it out. You must also need a mortgage to help you buy it. There is a higher price limit of £450,000 for properties in London.
This makes it sound as if all properties, old and new, are eligible, yet that is not the case. The Equity Loan scheme applies only to new builds. The Shared Ownership programme also applies to new builds, but other properties may be available via resale. Housing associations sometimes put up such properties for sale, so this is worth thinking about.
Can I pay more than 5% deposit on Help to Buy?
It depends on the scheme you choose. We would recommend you consider which version of Help to Buy you are likely to use, so you can work out the figures in that circumstance. Reading the FAQs on the official government website will help you understand the details of the scheme you decide to use.
Is it worth using a Help to Buy calculator?
If you are considering getting any kind of mortgage you will likely have encountered relevant financial calculators online. These are designed to provide more information about your financial situation – whether you can afford a home loan and if so, how much you could borrow.
If you are thinking about Help to Buy, it is important to look for a calculator designed to cater to this type of loan. There are plenty of them online, so make sure you find one on a reputable site and use it to get some figures you can work with. A point to remember here is that what the HTB calculator will lend you may differ from what a mortgage lender will actually offer you. It will help you understand your situation better.
All schemes and programmes have advantages and disadvantages. The main pros of Help to Buy involve greater affordability when you want to buy your own property to live in. You will also likely require a much smaller deposit – and a smaller mortgage – than you’d need if you decided to go it alone.
Of course, just as there are advantages to this scheme, there are a few downsides too. Not all lenders provide mortgages that tie in with the scheme, so you will have fewer options to choose from. There is also a danger that if house prices fall as they have done in the past, you could be stuck in negative equity. While you can look at the information on the scheme and find out all the applicable rates and terms at present, these are subject to potential change. You’re also out of the running if you want to buy an existing property rather than a new build. As we discovered, there is also a maximum value you can go to for the cost of a property.
In short, you should read more about each of the elements comprising the entire Help to Buy scheme before deciding whether it is right for you. It has helped thousands of people get on the housing ladder where they may not otherwise have been able to do so. That doesn’t mean it is right for you though.
The Mortgage Broker Limited can provide further advice about the scheme and what you should expect from it. Our experts are within easy reach – just send us an email detailing your situation and requirements, and we will respond in due course.