Getting on the property ladder has become easier in recent years thanks to Government interventions in the housing market.
Help to Buy is currently the flavour of the month for those looking to buy their first home or move up the ladder, who are looking to move into a new build home.
It arrived when Chancellor George Osborne expanded the Government’s deposit boosting offer for those buying newly-built homes in the Budget, to include both first-time buyers and home movers on properties worth up to £600,000.
What is Help to Buy?
Help to Buy was launched by the government in the 2013 Budget to support £113 billion worth of mortgages in England.
You will only need a deposit of at least 5% on properties worth up to £600,000.
The Help to Buy scheme provides a 20% equity loan from the government, topped up with a 5% deposit from the borrower so you can put down 25% towards a mortgage.
How does Help to Buy work?
To obtain a Help to Buy mortgage you first need to find a property under the scheme.
There are four steps to getting a Help to Buy property.
Once you have found a potential Help to Buy property through a developer, you will need to see a financial adviser to assess your income and find a suitable mortgage. They will help assess if you can pay a reservation fee, deposit and other legal fees and taxes.
Much of this deal will be completed on a Help to Buy property information form, which comes from the developer. This will show your proposed purchase, your proposed main mortgage, deposit and includes your household income.
You must also reserve the home, which may have a fee.
The form is then signed by you and the house builder and sent to the local Help to Buy agent.
The local Help to Buy Agent checks you can afford your main mortgage and ensures you have signed the declaration that the Help to Buy home will be your only residence. You will then receive an ‘Authority to Proceed’ document within four working days of the house builder submitting your fully completed form.
Your financial adviser will then be able to proceed with a full mortgage application.
You will need a solicitor to help advise you on the equity loan aspect of the scheme. Your solicitor will explain the legal implications of the equity loan, that the Help to Buy home must be your only residence and the consequences of a fraudulent application.
Your solicitor checks that your mortgage offer, property price and available funds are consistent with the Authority to Proceed, and requests permission to exchange contracts from the Local Help to Buy Agent.
Your Local Help to Buy Agent issues approval and contracts are exchanged.
There will then be an agreed date for purchase.
Once completion has taken place you own the property and can move in.
Your solicitor returns confirmation of the sale to your Local Help to Buy Agent who then registers your details with the Post Sales Help to Buy Agent.
A second charge is registered on your home by your solicitor, entitling it to a share of the future sale proceeds for the equity loan. The charge will be equivalent to the percentage contribution made towards the purchase price. You must repay the percentage contribution when you sell your home or after 25 years – whichever is earlier.
The government will provide you with up to 20% of the deposit.
This is interest–free for the first five years, but after that there is a yearly loan fee of 1.75%, rising by the change in the retail prices index plus 1 per cent each year.
For example, if the retail prices index is 5%, in the second year after the end of the interest -free period, or the seventh year of living in your Help to Buy home, the interest repayment on the loan would increase by 6%, from 1.75% to 1.86%.
You will also have to pay back the equity loan when you sell your home, or at the end of your mortgage period – whichever comes first.
When you sell your Help to Buy home, unless you have chosen to repay your equity loan earlier, you must repay the equity loan portion from a share of the sale proceeds.
So, if you received a 20% contribution, your repayment will be 20% of the total market value when it is sold.
You can choose at any time to make voluntary part repayments, known as ‘staircasing’ or a full repayment, of the Help to Buy assistance at the prevailing market value. The minimum voluntary repayment is 10% of the market value at the time of repayment.
The Help to Buy equity loan document commits you to repaying whatever percentage contribution you receive at the market value when you come to sell.
This means if the market value of your property falls below the level at which it was first purchased, you will repay less than the original amount that was contributed to the original purchase.
As long as you have complied with all your obligations in the Help to Buy mortgage deed, you will not be required to provide for any shortfall in the equity loan if you sell when values have fallen.
There is a bigger choice of lenders compared with the NewBuy scheme, mainly because most banks hook the Help to Buy loans to their standard range.
The Help to Buy rates on offer from banks and building societies are pretty similar, ranging from 3% to 3.5%.
The rate is generally slightly higher than rates on equivalent 75% loan-to-value loans.
As well as the headline rate there are a variety of charges associated with each mortgage to consider, so you must shop around to make sure you understand the cost of all fees.
Purchase Price £121,000
Personal 5% Deposit = £6,050
20% Equity Loan = £24,200
Mortgage Required = £90,750
First Time Buyer
2.29% Fixed for 2 years from completion
£400 lenders arrangement fee (can be added to mortgage)
£99 lenders booking fee (payable on application to lender)
£180 valuation fee
Monthly payment (25 year repayment basis) = £399.78
The overall cost for comparison is 3.8% APR
Costs (on top of 5% deposit, lenders fees and valuation fees):
Solicitors = approx £1,000.00
No Stamp Duty on proprerties valued under £125,000
Purchase Price £157,000
Personal 5% Deposit = £7,850
20% Equity Loan = £31,400
Mortgage Required = £117,750
First Time Buyer
2.29% Fixed for 2 years from completion
£400 lenders arrangement fee (can be added to mortgage)
£99 Lenders booking fee (payable on application to lender)
£205 valuation fee
Monthly payment (25 year repayment basis) = £518.07
The overall cost for comparison is 3.8% APR
Costs (on top of 5% deposit, lenders fees and valuation fees):
Solicitors = approx £1,000.00
Stamp Duty = £1,570 (1% of purchase price)
