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Low deposit? Not a problem with Help to Buy…

31.01.2014

 

Rapidly rising house prices and the soaring cost of private rent means that for many, being able to save a deposit to buy their own home will seem an impossible task.

We all know that to get a mortgage, you’ll need a deposit of at least 5%. But to access the best interest rates, you’ll need to save three or four times this amount again. So what options are available if you only have a small deposit?

The good news is that the government has recognised the difficulties being faced by buyers and has created Help to Buy. Aimed at addressing the gap between the deposit required by lenders and what buyers can afford to save, this scheme enables those who are eligible to buy their own home without a large deposit.

Help to Buy is made up of three main parts – equity loans, NewBuy and mortgage guarantees – each of which are explained below.

Equity loans

Equity loans are available to first-time buyers and existing home owners but can only be used to buy a new build property worth up to £600,000.

For this you need to raise a deposit of at least 5% of the purchase price. The government will lend you up to 20% of the property’s value as an equity loan and you’ll need to secure a mortgage for the remaining 75% of the cost.

You won’t be charged fees on your equity loan during the first five years. However after this period, you’ll be charged an annual fee of 1.75% of the equity loan, rising each year by inflation plus 1%.

Any fees you’ve paid won’t be used to pay off your equity loan. Instead it’ll be paid back in full at the end of your mortgage or when you sell your home – whichever one comes first. Plus, by borrowing 75% of the property’s value, you’ll also have access to lower interest rates than you would at 95%.

NewBuy

The NewBuy scheme is open to first-time buyers and existing home owners, and will enable you to buy a new build property, priced up to a maximum of £500,000, with just a 5% deposit.

To be eligible, the home you’re buying must have been built by a builder taking part in the NewBuy scheme. The property must also be owned fully by you as NewBuy isn’t available for shared ownership or shared equity purchases.

Mortgage guarantees

Unlike the equity loan scheme, you can use the mortgage guarantee scheme to buy a new build property or one which is pre-owned, up to a value of £600,000. This scheme is also open to existing home-owners as well as first-time buyers.

As with a normal mortgage, you’ll need to raise a deposit of at least 5%. The remaining 95% will be borrowed through a mortgage, however the government will guarantee any mortgage borrowing above 80% of the property’s value.

So how will this work in practice? If you took out a 90% mortgage, the government would guarantee to repay your lender up to 10% of the property’s value if you defaulted on your borrowing. However if you took out a 95% mortgage, the government would guarantee 15% of the property’s value.

This acts as an ‘insurance policy’ for the lender and provides reassurance that they won’t be disadvantaged if you fail to keep up with repayments.

Can I use the scheme to buy a buy-to-let property?

No, the rules are very strict around this. Any property you buy using an equity loan, NewBuy or mortgage guarantee must be your main place of residence and can’t be sub-let.

Will I have to pass the ordinary credit checks?

Yes, just like you would with a normal mortgage application, you’ll need to pass a credit check and prove that you can cover mortgage repayments.

The mortgage provider will also check affordability, to make sure that your income will cover your mortgage repayments even if interest rates rise.

Is Help to Buy for me?

Affording the deposit is just one step in the home buying process. You also need to consider legal fees and disbursements, such as stamp duty, searches and VAT.

If Help to Buy isn’t right for you or you’re not eligible for the scheme, there are other options you could consider. One example of this is shared ownership, which allows you to buy a stake – such as 25% or 50% – in a property. You’ll need to pay rent on the remainder but will have the option to purchase the remaining share of the property at a later date.

Further information

If you’re buying a property through the Help to Buy scheme, complete our short form for a free conveyancing quote. Our charges are transparent and we quote for all fees and disbursements up front, meaning that you’ll understand the full extent of your conveyancing charges from the very start.

If you’d like further advice from our conveyancing solicitors in Bristol about buying or selling your property, call us on 0117 325 2929.

You can also visit our downloads page for more advice and information about the conveyancing process.

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