There are a number of government schemes to help you buy a home such as Help to Buy, Right to Buy, Shared Ownership, and more. Help to Buy
- Right to Buy
- Shared ownership
- Co-Ownership in Northern Ireland
- First Steps London
- Shared equity schemes
- NewBuy scheme for new-build properties
What is Help to Buy?
Help to Buy is the name of a government programme in the United Kingdom that aims to help first time buyers, and those looking to move home, purchase residential property. It was announced in Chancellor of the Exchequer George Osborne’s 2013 budget speech, and was described as “the biggest government intervention in the housing market since the Right to Buy scheme” of the 1980s. It is an extension of a previous programme called FirstBuy that was aimed solely at first-time buyers. Help to Buy has itself been expanded and extended.
The government has created the Help to Buy scheme to help hard-working people to take steps in order to buy their own home. The new Help to Buy: ISA pays first-time buyers a government bonus. For example, save £200 a month and we’ll add £50, up to a maximum of £3,000, boosting your ISA savings of £12,000 to £15,000.
There are two ways to make use of the scheme:
- Equity loans where the government lends first-time buyers and existing homeowners money towards a newly built home.
- Mortgage guarantee where the government promises your lender that it will cover part of any losses they may sustain as a result of the mortgage not being repaid. This is available for new and old properties across the UK.
It’s important to note:
- you can’t use these schemes to buy a second home or a property to rent out
- if you use Help to Buy, you can only take out a repayment mortgage
Help to Buy: equity loans
Equity loans are open to both first-time buyers and home movers on new-build homes in England with a purchase price up to £600,000. You won’t be able to sub-let your home if you use this scheme. It must also be your only property.
How it works
With an equity loan:
- you’ll need to contribute at least 5% of the property price as a deposit
- the government will give you a loan for up to 20% of the price
- you’ll need a mortgage of up to 75% to cover the rest
Equity loan fees
You won’t be charged loan fees for the first 5 years of owning your home. In the sixth year, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year. The increase is worked out by using the Retail Prices Index plus 1%. Your Help to Buy agent will contact you before the fees start, to set up monthly payments with your bank. You’ll also be sent a statement about your loan each year. Fees don’t count towards paying back the equity loan.
Applying for an equity loan
Contact the Help to Buy agent in the area where you want to live if you’d like to buy a home with an equity loan. You must buy your home from a registered Help to Buy builder. Your Help to Buy agent should have a list of registered builders for you to choose from.
Selling your home and paying back the loan
You must pay back the loan after 25 years or when you sell your home – whichever is earliest. How much you pay back will depend on the market value at that time. You can pay back part or all of your loan at any time. The minimum percentage you can pay back is 10% of the market value of your home. The amount you pay will depend on the market value at that time.
Help to Buy: Mortgage guarantees
Before applying for a mortgage you’ll need to think about more than just whether you can afford the monthly repayments. Mortgage providers will be looking at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change. Learn more about how lenders assess how much you can borrow.
In the past, mortgage lenders largely based the amount you could borrow on a multiple of your income. This is known as the loan-to-income ratio. For example, if your annual income was £50,000, you might have been able to borrow three to five times this amount, giving you a mortgage of up to £250,000. Now, when you apply for a mortgage, the lender will cap the loan-to-income ratio at no more than four and a half times your income. They must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income. This is called an affordability assessment.
These changes were brought into effect by the Financial Conduct Authority in 2014 following a comprehensive review of the mortgage market. The lender must also look ahead and ‘stress test’ your ability to repay the mortgage. This takes into account the effect of potential interest rate rises and potential changes to your lifestyle, such as redundancy, having a baby or career break. If the lender thinks that you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.
How they work
These are government-backed mortgages. The aim is that the guarantee will encourage the lender to give you a mortgage which only requires a small deposit.
Mortgage guarantees are for:
- people living in England, Wales, Scotland and Northern Ireland
- buyers with a deposit of at least 5% of the purchase price
- first-time buyers and existing homeowners who are moving
- new or old properties selling for up to £600,000
They are not for:
- second homes
- properties you intend to rent out
- anyone who is using or going to use another home buying scheme
How do I get a mortgage guarantee?
Most major lenders are now offering mortgages under the Help to Buy guarantee scheme. Be aware that the lender will check you can afford mortgage repayments. You are still responsible for paying the mortgage in exactly the same way as any other mortgage. By using a mortgage guarantee for remortgaging or if your home’s value has dropped or if you owe your existing mortgage lender 95% of the cost of the value, a few lenders are offering mortgage guarantees to those looking to remortgage.
You will need to provide proof for the following
- your basic income
- any other earnings you have – for example, from overtime, commission or bonus payments or a second job or freelance work
- income from your pension or investments
- income in the form of child maintenance and financial support from ex-spouses
- You will need to provide pay slips and bank statements as evidence of your income.
If you’re self-employed you’ll need to provide:
- business accounts
- bank statements
- details of the income tax you’ve paid
- credit card repayments
- any other loans or credit agreements you may have
- maintenance payments
- bills such as Council Tax, water, gas, electricity, phone, broadband
- insurance – building, contents, travel, pet, life, etc
Check your credit report as it is a good idea to check before applying for a mortgage. This will give you time to correct any mistakes in it and will notify you of any missed credit payments that could make the mortgage lender turn you down. Find out more on how to improve your credit rating.
The lender may ask for estimates of your living costs such as spending on clothes, basic recreation and childcare. They might also ask to see some recent bank statements to back up the figures you supply.
Availability of Help to Buy schemes
The Help to Buy Equity Loan schemes are available in England, Scotland and Wales but the maximum price of the property you can buy differs. In England the most you can pay for your home is £600,000. In Scotland it is limited to up to £250,000 and in Wales the limit is £300,000. The other type of Help to Buy scheme is the mortgage guarantee, which is available across the UK.
Important questions asked and answered
- Should I use the equity loan or mortgage guarantee scheme?
If you want to buy an old property you can only use the mortgage guarantee scheme. For new build flats and houses you can use either the equity loan scheme or the mortgage guarantee scheme. Speak to a mortgage adviser to help decide which scheme is the best one for you.
- I need to sell my home to buy a bigger one – do I qualify for both schemes?
Yes, both schemes are suitable for existing homeowners and first-time buyers, as long as the property price is not more that £600,000 (£250,000 for the equity loan scheme in Scotland, £300,000 in Wales).
- Will I have difficulty selling my home if it was bought through the mortgage guarantee scheme?
No buying a home through the mortgage guarantee scheme shouldn’t make a difference to how easy or hard it is to sell.
- Will I have difficulty selling my home if it was bought through the equity loan scheme?
No, but don’t forget that you’ll have to pay back your loan, plus a share of the price increase, when you do sell.
- Will I find it hard to get another mortgage when I move?
If your home’s value falls or stays the same, it could be harder to pay back the government’s equity share. This could make it harder to get another mortgage when you move.
The Help to Buy scheme only allows you to take out a repayment mortgage, so the amount you borrow gradually reduces over time. This means that by the time you come to sell you should own a bigger proportion of your property, even if house prices haven’t gone up. Discuss your options with your mortgage lender or broker before you start looking for another property.