I am a first time buyer. I have been trying to save enough money for a deposit but have been having difficulty doing so. I am aware that the Government has announced a ‘help to buy’ scheme. Can you please explain how the scheme works?
As a result of the property slump, most lenders decided that they would only give mortgages to buyers who were able to raise a 25 per cent deposit or more. The few lenders who were prepared to grant higher percentage mortgages charged a higher interest rate to compensate for the increased risk which priced-out a lot of first-time buyers.
The Government’s ‘help to buy’ scheme was launched to give first-time buyers an opportunity to get on the property ladder.
Phase one of the scheme opened in April 2013 and put simply, under the scheme, the Government lends up to 25 per cent of the property’s value as an equity loan. To be a successful applicant, the buyer requires deposit of at least 5 per cent of the purchase price. The buyer would also then obtain a mortgage of 75 per cent of the property’s value. The obvious benefit to getting an equity loan from the Government is that with a larger amount to put down, a buyer will hopefully get a mortgage at a more favourable interest.
Under the Equity Loan Scheme, the equity loan is interest free for the first five years but from the sixth year onwards, the borrower pays an administration fee. That fee starts at 1.75 per cent of the loan amount and increases every year by an increase in the retail price index plus 1 per cent.
Anyone who obtains an equity loan must remember that they will be paying those administration fees in addition to their mortgage repayments and the equity loan from the Government will not decrease in size unless the borrower wants to repay part of it early. Over a period of time the administration fee could become fairly expensive.
The loan must be repaid in full after 25 years when the mortgage term ends or when the property is sold, whichever is the first to occur and the amount repaid at the time is the market value of the loan at that time.
If the property falls in value, then the borrower repays less than was originally borrowed. The equity loan can be repaid early in chunks of either 10 per cent or 20 per cent of the total value.
The second phase of the scheme is a mortgage guarantee scheme and is not limited to new properties. The idea is that the Government guarantees to the lender that if they provide mortgage finance to a buyer who only has a deposit of between 5 per cent and 20 per cent of the purchase price, they will guarantee up to 15 per cent of the loan. This has the effect of reducing the lenders exposure and thereby reduces their risk.
Please be aware that all lenders have not yet agreed to participate in the schemes and you may wish to bear this in mind if you decide to take advantage of it. Although ‘help to buy’ may give you the opportunity to purchase a new home that you may not otherwise be able to afford, there are a number of limitations that you should carefully consider before making your decision
If you need further advice our highly experienced residential property lawyers can help. Call us on 01254 272640 email email@example.com and we will help make your experience, that much easier.