Help to Buy: how it works and who should apply
06-24-2015
Help to Buy: how it works and who should apply
Thousands of people, most of them first-time buyers, have used the government's Help to Buy scheme
Help to Buy, the government's flagship housing policy has now been used by almost 100,000 people, who have either topped up a small deposit with a loan from the government, or taken out a government-guaranteed mortgage on a new-build property. On these terms, Help to Buy has been a huge success.
Yet while the government says the policy ensures that young people are not left behind by a rising property market, some economists argue that the policy is in fact a primary contributor to the spectre of spiralling prices. Others warn that low-deposit purchases in a market that could be heading for another bubble creates a longer-term threat of negative equity for buyers.
One strand of the policy will continue until at
least 2020, and the brand is now being extended to government-boosted savings accounts, so Help to Buy is clearly here to stay. But what is it and how might you benefit from the scheme?
Help to Buy Q&A: how it works and who qualifies
What is Help to Buy?
Help to Buy has two phases, both of which are aimed at buyers with only a 5 per cent deposit. The first, a government loan scheme for buyers of newly-built properties worth up to £600,000, was introduced in April 2013 and has been taken up by more than 49,000 people, more than 40,500 of which were first-time buyers, according to official figures.
The second phase, which covers new and second-hand homes, started accepting applications in October 2013. While similarly targeted at those with a 5 per cent deposit, this works through a government
guarantee which is built into the mortgage and covers a portion of any losses in the event of foreclosure.
How does phase one of Help to Buy work?
The first phase of Help to Buy applies only to new homes. Borrowers need to raise a 5 per cent deposit on the property and can then borrow a further 20 per cent from the government, initially interest free, up to a maximum of £120,000. After five years, what remains of the loan will attract interest at 1.75 per cent per year. The rate will increase each year by 1 per cent above inflation.
Initially a £3.5bn scheme due to run to next year, the government announced last year it would commit an extra £6bn to extend the English portion of the programme until 2020. Based on estimates from the government, it will support the construction of about 194,000 homes. Wales is also likely to extend its version of the program beyond 2016.
What happens if you can't pay your mortgage?
If you take out an equity loan and find you can't pay your mortgage, you'll probably have to sell the property or the bank will repossess it and sell it for you. Citywire warns prospective borrowers that the 20 per cent equity loan will still need to be paid back to the government.
And phase two?
Phase two of Help to Buy applies to home movers as well as first-time buyers and second-hand houses as well as new ones. In this phase, the government does not loan money to the homebuyer but provides a guarantee to the lender for up to 15 per cent of the loan. That will allow borrowers with only a 5 per cent deposits a much wider choice of mortgage deals. As in phase one, there is a limit of £600,000 on the value of the property.
According to the official statistics, nearly 47,000 borrowers have bought a home through this portion of the scheme, with the total value of government guarantees approaching £1bn.
Why do lenders need loan guarantees?
The government guarantee reduces the bank's losses if a borrower defaults on his or her payments. "That allows them to offer cheaper mortgages to would-be home-buyers with small deposits, who are currently locked out of the market," explains the Daily Telegraph.
How much can you borrow?
In theory, up to £570,000, but the Telegraph notes that "lenders will apply a strict cap on income multiples (a likely maximum of five times earnings, single or joint) as well as tough limits relating to the amount of income borrowers have spare at the end of the month". That's likely to mean that mortgage payments may not exceed 55 per cent of borrowers' post-tax income.
"Those who qualify for the loans will, in the most part, need to have good jobs and earn substantial incomes. And the mortgages offered them may be far smaller than they expected or hoped," the Telegraph concludes.
Are there an unlimited number of 95 per cent loans on offer?
No. The government is making £12bn available in loan guarantees, enough to fund mortgages worth a total of £130bn. The scheme will remain open for three years and phase two has not been extended, meaning it wraps up next year.
Who is excluded from Help to Buy?
The new loans aren't means tested, but they won't be available to people wanting to buy second homes or buy-to-let properties. Prospective borrowers will be required to sign documents confirming they are first home buyers or, if they already own a home, that they are in the process of selling it.
Who has benefited from Help to Buy?
According to the government's numbers, 80 per cent of users have been first-time buyers, allaying fears that the system would only help people already on the property ladder to buy bigger homes. The average house price for a Help to Buy completion is £184,000, below the national average.
A Help to Buy Isa, which is being launched later this year and tops up savings of first-time buyers committed to saving into an account for use towards a house deposit, will increase the number of first-time buyers using the scheme, the government has said.
The figures also suggest that people living outside London and the South East have benefited the most from Help to Buy, particularly in Leeds, Glasgow and Birmingham. According to the government release, 95 per cent of sales have taken place outside of London.
The scheme has also pleased those in the construction industry, a sector which has experienced a much-needed boom in the past year. "Such has been the success of Help to Buy for our national and regional house builders, that many developers have been struggling to cope with demand," James Chidgey, senior manager of new build at Nationwide wrote in Mortgage Solutions.
So, does that mean it has been a success?
It depends on who you listen to. The Bank of England has given the scheme its seal of approval with governor Mark Carney confirming that it does not "pose material risks to financial stability" in the UK. The Tories trumpet the policy at every opportunity, saying it has helped younger first-time buyers around the country to get onto the property ladder, on contrast to opposition claims.
First-time buyers have indeed bought homes through the scheme and more are apparently keen to do so: according to a report in FTAdviser, the scheme is the most popular way for first-timers to get onto the housing ladder, with research by mortgage and loans provider Ocean Finance revealing half of prospective buyers in a survey would use the equity loan or guarantee scheme to overcome the barrier of having a large deposit. Some 40 per cent stated that a deposit remains the biggest hurdle to getting on the housing ladder.
On the other hand, Matthew Pointon, property economist at Capital Economics, has been quoted in the Guardian echoing the old criticism of the scheme that it contributes to house price inflation and is therefore responsible for locking out the next generation of first-time buyers, even as it provides temporary support to many buying now.
"The Help-to-buy scheme was able to temporarily boost the availability of low deposit mortgages, helping a lucky few first-time buyers. But that improvement is proving to be temporary, as the resulting boost to house prices acts to lock other would-be buyers out of the market," Mr Pointon said.
Help to Buy has reduced the average age of the first time buyer by six years, according to official data analysed by the Mortgage Advice Bureau and reported by the Daily Telegraph. The average age of people who bought property last year through the scheme was 31, compared to the overall national average age of 37.
First time buyers are also being warned that phase two of the scheme could end up costing them more in the long term, the Daily Telegraph reports.
For buyers looking to purchase the average home worth £231,487 with a five per cent deposit over a repayment term of 35 years, their loan would cost them £409,100, according to the Mortgage Advice Bureau. Those who were able to secure 25 per cent deposit would pay significantly less: £370,934, saving themselves over £40,000.