First-time buyer mortgages Help to Buy scheme explained
With property prices still high, saving up a 20% deposit may seem like an impossible task. The government has recognised this, and has created a scheme to help those of you without a large deposit either purchase their first property or move to a new home.
In this guide, we give an overview of how the Help to Buy scheme works, showing you if you're eligible for the scheme and what homes qualify under it.
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Help to Buy scheme - do I qualify for it?
To be eligible for help from Help to Buy, you must:
- Have a deposit of at least 5%;
- Be looking to buy a home worth £600,000 or less;
- Be purchasing a property you intend to live in most of the time;
- This means you can't buy a property you intend to let out or use as a second home.
There are two parts to the scheme - equity loans and mortgage guarantees. Here you'll find out about both. Read our guides to Help to Buy Mortgage Guarantees and Help to Buy Equity Loans for more information.
Help to Buy scheme - mortgage guarantees
Most of the UK's biggest mortgage lenders have signed up to offer Help to Buy mortgages, as well as smaller lenders.
Help to Buy mortgages work like this:
- You'll put down a deposit of at least 5%
- You can borrow up to 95% of the property's price from a mortgage lender.
- The government will then guarantee any mortgage borrowing above 80% of the property's value.
- For example, if you took out a 85% mortgage the government would guarantee to repay your lender up to 10% of its value if you defaulted.
But all of this goes on behind the scenes, for you as the borrower it is no different to any other mortgage. You are responsible for repaying the whole loan and could face repossession if you fell into arrears.
For the lender, this will mean that lending to people with small deposits will carry much less risk, so it should create much more choice for borrowers. However the government is giving lenders the freedom to set their own interest rates as part of the scheme, so there are no guarantees you'll get an attractive rate.
Help to Buy scheme - equity loans
How equity loans work
A Help to Buy equity loans are only available to people who want to buy a new build property. They work like this:
- The government lends you up to 20% of the property's value as an equity loan;
- You'll need a deposit of at least 5%;
- You'll need to get a mortgage of 75% of the property's value.
So if you wanted to buy a house worth £200,000, it would break down as:
- A £40,000 loan from the government;
- A £10,000 deposit put down by you;
- A £150,000 from a mortgage lender.
The benefit to getting an equity loan from the government is that with a larger amount to put down, you'll hopefully get a better mortgage rate from your lender.
Equity loans - what you'll have to pay back
- The equity loan is interest free for the first five years;
- From the sixth year onwards you will pay an admin fee;
- The admin fee will start at 1.75% of the loan;
- The admin fee will increase every year by any increase in the Retail Prices Index plus 1%.
Remember, you will be paying these fees in addition to your mortgage repayments and the equity loan from the government will not be decreasing in size (unless you opt to repay part of it early). So, over time the cost of the admin fee could become pretty expensive.
You will need to repay the equity loan in full after 25 years, when your mortgage term finishes or when you sell your home - whichever happens first. You will repay the market value of the loan at the time, rather than a fixed cash amount. In practice, this means:
- You take a 20% equity loan to buy a property worth £200,000, or £40,000;
- When you sell the property, it's worth £250,000;
- You repay £50,000 - this is 20% of the new value of your home, not the amount you borrowed;
- If the property had dropped in value, you'd pay less than you borrowed.
You can also choose to repay part of the loan early in chunks of either 10% or 20% of the total value.
Impartial Mortgage Advice
We believe you should seek independent mortgage advice before taking out a mortgage. The Which? Group offers an impartial mortgage advice service, Which? Mortgage Advisers, that looks at every mortgage from every available lender. You can also find an independent mortgage adviser using Unbiased.co.uk.