In a world where aspiring home owners, especially first time buyers, find it difficult to amass a large deposit, high loan to value (LTV) mortgages provide a vital route in to owner occupation. In particular, they give those without financial backing from their family the chance to buy sooner rather than later.
That’s why the news that Help to Buy Scotland (the scheme that provides 95% mortgages for new build homes through a 20% government interest free loan) ran out of money in mid-July was potentially so important. Here’s how the BBC reported it: http://www.bbc.co.uk/news/uk-scotland-28331541. And you can find GSPC’s summary of the scheme here.
So, does that mean the end of 95% loan to value mortgages? Err, no.
First things first, Help to Buy 2 is still up and running. This is the UK wide scheme that provides 95% mortgages by offering the lender a government backed guarantee for 15% of the loan value, provided the buyer has a 5% deposit (and can afford the repayments). The government guarantee – which lasts for seven years – provides the security the lender needs to offer a 95% mortgage.
In some ways, Help to Buy 2 is more valuable than Help to Buy Scotland because it can be used to buy established as well as new build homes. It has also prompted lenders to offer 95% LTV mortgages without taking up the guarantee from the government (because there is a cost to them for taking part in the scheme). Just Google ‘95% mortgages’ if you want to know more.
In short, it’s still possible to get a 95% LTV mortgage provided you can show to your lender that you can afford the repayment – even if interest rates rise.
Even so, Help to Buy Scotland was hugely popular. Not only does it allow you to buy a brand new home with just a 5% deposit, it also provides what is effectively an interest free indefinite loan of 20% of the purchase price. And there is no incentive to pay down the loan. It remains interest free as long as you live in the house.
In short, it means you can buy a home and only pay interest on 80% of the mortgage. Of course, you have to pay the loan back if you sell (plus an equivalent share of any capital gain), but the advantage in lower mortgage payments has been too much for many to resist. It also has the added attraction that lower mortgage payments and a contribution of 20% to the purchase price can help you to buy a larger house than you might otherwise have been able to afford.
No wonder the scheme ran out of the money allocated to it for this year so quickly.
When the scheme was closed for the rest of 2014, the government described this as a ‘pause’ and that is not such a bad description.
Help to Buy Scotland will be available again in the next financial year (starting 5th April 2015), so if you are planning to buy a new home with an entry date of April or later next year, you could still qualify. No doubt builders will start advertising ‘Help to Buy’ properties for sale with a completion date of April 2015 some time this autumn.
Given the huge uptake, the chances are the Scottish government will want to make the scheme somewhat less attractive by the time the next tranche of money becomes available. That could mean reducing the maximum value of properties that can be bought using Help to Buy (the current cap is £400,000) or limiting it to first time buyers or starting to charge interest on the loan at some point in the future (as happens with the equivalent English scheme). A less likely option would be to reduce the size of the loan to 15% of the property value.
Even so, it’s likely to remain a pretty good deal. So, if you want to take advantage of it when it is next available, you’d better start planning now.