Help to buy explained

Struggling to get a foot on (or up) the property ladder? Here's our round-up of Government schemes that could provide just the boost you need.

Being a first-time buyer usually means forking out rent, saving for a deposit and playing catch-up with ever-rising house prices all at the same time. No easy feat.  

But the good news is, there are a range of Government schemes available which could provide just the boost you need to make it to the first (or next) rung of the housing ladder. We've outlined them below.

Help to Buy 

Help to buy provides a leg-up to buyers who can only muster a 5% deposit. While the scheme is not limited to first-time buyers, the vast majority of applicants fall into this category.

When Help to Buy was launched back in 2013, there were two parts to the scheme, Equity Loan and Mortgage Guarantee. As planned, the latter part (whereby the Government offered a guarantee to banks and building societies of up to 15% of the property price to encourage them to lend larger loans) was scrapped at the end of 2016.

Help to Buy Equity Loan 

The remaining part of Help to Buy is the Equity Loan. The scheme requires a minimum 5% deposit of the property value with the Government offering an interest-free loan of a further 20%. The remaining 75% is covered by a standard mortgage.

As an example, if you wanted to buy a £200,000 property under the Equity Loan scheme, you'd need a minimum deposit of £10,000 and to qualify for a £150,000 mortgage. The Government then provides an equity loan of £40,000.

This is how the £40,000 equity loan works:

  • There is no interest to pay for the first 5 years
  • In year 6, interest (known as a 'loan fee') kicks in at 1.75%
  • The rate increases every year thereafter at the RPI (retail prices index) measure of inflation plus 1%

 

You can opt to pay fees in a single annual payment or by monthly direct debit. But bear in mind they are purely fees and will not go towards repaying the equity loan.

The idea with the Help to Buy Equity Loan is that, because you're theoretically only borrowing 75% from the mortgage lender, rates will be cheaper than on a 95% mortgage. However, just like with the now-archived Mortgage Guarantee, don't assume this is always the case. Make sure you always compare mortgage deals with a comparison website and/or independent mortgage broker.

When you come to sell your home (or at the end of the 25-year mortgage term if you decide to stay put), the Government will take back its 20% share regardless of whether that's at a profit or a loss. You can opt to repay the loan at any time during the first 25 years but only in minimum 10% increments of the property's current market value.

The Help to Buy Equity Loan is only available on new-build properties in England worth up to £600,000. The scheme will remain open until 2020. 

Help to Buy ISA

The Help to Buy ISA which launched in December 2015 is designed to boost first-time buyers' savings pots. For every £200 you save into the account, the Government will add £50. This is up to a maximum bonus of £3,000 (which applies to £12,000 of savings). 

It's important to note however (and this transpired some time after the account was launched) that the Help to Buy ISA bonus cannot be put towards your initial deposit which is payable at exchange. Instead, the tax-free lump sum will be paid directly to the mortgage lender at completion.

In other words, you'll have to save the initial deposit yourself and use the bonus to reduce the overall mortgage amount and subsequent monthly repayments.

There are other limitations too, such as a £250,000 price cap on property the bonus can be used to buy, although this rises to £450,000 in London.

Bear in mind a Help to Buy ISA is a cash ISA, and you are only permitted to pay into one cash ISA in each tax year. However, you will be able to use your Help to Buy ISA savings in conjunction with any other Government scheme such as Help to Buy or Shared Ownership.

Banks and building societies offer their own Help to Buy ISAs and interest rates vary so be sure to shop around.  Some accounts incorporate an upfront bonus that falls away after an initial 'honeymoon' period, which is something to watch when saving over the long term.

Is a Help to Buy ISA for you? Check out our handy Help to Buy ISA pros and cons

Lifetime ISA

The recently-launched Lifetime ISA offers a tax-free boost of up to £1,000 a year towards either buying your first home or saving towards retirement.

Savers aged 40 or under can open one of these accounts and put away up to £4,000 each year. The Government will then boost returns by 25p for every £1 saved and pay the bonus directly into the account. 

For the first year (2017/2018), the Government bonus will be paid annually. But from April 2018, it will switch to monthly.

You can opt to use your Lifetime ISA as a deposit on a property worth up to £450,000 anywhere in the UK, so long as you are a first-time buyer.

You will be able to transfer your Help to Buy ISA balance into your Lifetime ISA without losing the tax-free benefits.

However, Lifetime ISAs are slightly more complicated than Help to Buy ISAs as they will be available as either cash or stocks and shares.

Starter Homes scheme

In March 2015, the Government announced the launch of a new Starter Homes scheme. Having gone quiet for a while, housing minister, Gavin Barwell confirmed that construction on the first Starter Homes would get underway in 2017 with first completions earmarked for 2018. 

Starter Homes will be available to buyers aged between 23 and 40 who don't own a home and have never owned one before.

The 200,000 new homes built under the scheme will be sold at a minimum discount of 20% of the market price. The discount is made possible by the Goverment's 'double whammy' of offering developers the chance to build on cheaper brownfield commercial land and waiving taxes.

There's a £250,000 price cap on homes available under the scheme

Shared Ownership 

As it says on the tin, Shared Ownership schemes allow you to purchase just share of a home (between 25% and 75%) from a local Housing Association and pay an affordable rent on the part you don't own.

Under a process known as 'staircasing' you'll then be given the chance to buy back chunks as and when you can afford to until you own 100% of the home. These chunks will be priced at the home's current market value as assessed by the Housing Association. You will also have to pay a valuer's fee each time.

To qualify for Shared Ownership, you don't have to be a first-time buyer but your household income must not exceed £80,000, or £90,000 if you're buying in London. The scheme is available on both new-build and resale properties.

 Right to Buy

Right to Buy enables council tenants with at least three years consecutive years tenancy (reduced from five years in May 2015) to potentially buy their home at a significant discount. You can find out if you are eligible for the scheme at the Government website.

Council tenants (or those living in their homes when it was transferred to another landlord) will benefit from deeper discounts if they want to buy their property. 

Maximum discounts currently stand at £78,600 in England. They increase at the start of each tax year in line with the CPI measure of inflation.

Getting there without help

It is still possible to get on the housing ladder with only a small deposit without a leg-up from these types of schemes. Mortgages that are not backed by the Government are available for deposits of between 5% and 10%. And some may even offer a better rate or terms for your personal circumstances. Always do your research and compare mortgages at different deposit levels. 

Finally, don't forget to factor in stamp duty which is payable on all primary homes worth over £125,000. Click the below icon to see how much stamp duty you will have to pay. 

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