First-time buyer mortgages What is Help to Buy? Video guide

 

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Video transcript

If you've been struggling to save up a big enough deposit to get a mortgage, the government's Help to Buy Scheme could be the thing for you. But what is it? And how exactly does it work? Keep watching to find out. There are two parts to Help to Buy's game and both are available to anybody looking to buy a new house.

As long as you have a deposit of at least 5% and I look in to buy a house to live in that's worth 600, 000 pounds or less, I hope to buy equity loan is available if you want to buy anew built property the government will lend you up to 20% of the property's value, you put down a deposit of 5% and then borrow the rest.

The equity loan is interest free and fee free for the first five years, but after that you will have to pay a monthly administration charge, you'll need to repay the equity loan in full of the 25 years when your mortgage turn finishes or when you sell you home. Whichever happens first, how much you have to repay depends on how much your property is worth at the time, rather than repaying the actual amount you borrowed plus interest, as you would on a normal loan, you would always repay the same percentage you borrowed.

If the value of your house is gone up, you'll pay back more than yo borrowed, but if the value of your property is going down, you'll end up paying back less than you took out in the first place of you're not looking specifically for a new built property, the Help to buy mortgage guarantee will make it easy for you to get a mortgage.

This parts of the scheme is a deal between the lender and the government loan, so it doesn't impact on you directly. All of the work goes on behind the scenes with the government backing your deposits making the lender feel more secure about giving you the money. Some lenders are specifically advertising helped by mortgages for people with deposits between 5% and 20%, but we found that there are plenty of mortgages not backed by the scheme offering similar rates. So shopping around is the key to getting the best deal.

If you are interested in Help to Buy speak to a mortgage adviser about whether or not it's the best option for you, and whether there's a better solution out there. Our independent mortgage advisers show thousands deals to find the right one for you, and you can also use Witchers mortgage comparison tables to help you find the very best deal.

What is Help to Buy?

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.

Go further: Which? mortgage comparison tables - compare the best deals on the market

Help to Buy scheme - do I qualify for it?

Help to Buy aims to help people with a small deposit buy a house

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

House on a calculator

Help to Buy equity loans are only available for new-build properties

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.

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