The launch within days of two different schemes to provide 95% mortgages, both of which are called Help to Buy, has caused some confusion. So here is brief outline of both schemes
Help to Buy 1 – New Homes in Scotland
The first version of Help to Buy is aimed exclusively at new build homes.
If you want to buy a new build home from a participating builder up to a value of £400,000, the Scottish Government will provide up to 20% of the purchase price (and take an equivalent equity stake in the property) as long as you have a 5% deposit.
Provided you meet the relevant affordability criteria, that should allow you to obtain a mortgage from participating lenders with just a 5% deposit. The mortgage must be a repayment mortgage, not interest only.
The government’s 20% stake is interest free and you can pay it off at any time, in part or in whole, but you must pay it off if you sell your home. If the value of your home has risen by the time you sell it, the amount you repay the government will reflect the increase in the property value.
You don’t have to be a first time buyer, but the property does have to be your main home – you can’t buy a second or buy to let property with this scheme. If you already own a home, you must sell it before you can qualify for this scheme. You cannot use a part exchange scheme provided by the builder if you want a mortgage under the Help to Buy scheme.
A similar scheme in England is credited with a big jump in new build starts south of the border and the hope is that the same will happen here.
The next step: If you want to take advantage of this version of Help to Buy, your next best step is to find a new build property that is under the scheme and talk to the builder. They will be able to help you to start the application process. You can find a list of participating builders here.
Help to Buy 2 – all properties in the UK
The second version of help to Buy applies to all properties, established as well as new build homes, up to £600,000,
Under this scheme, the UK government provides a guarantee to the lender for 15% of the loan value, provided you have a 5% deposit. The government guarantee – which lasts for seven years – provides the security the lender needs to offer a 95% mortgage. Again, the loan must be a repayment mortgage, not interest only.
The lender will have to pay the government for this guarantee, so interest rates on these mortgages are going to be higher than they would be if you had a bigger deposit. Royal Bank of Scotland has launched a two-year fixed rate at 4.99% under the scheme and the Bank of Scotland has a similar mortgage with an interest rate of 5.19%. Barclays, HSBC, Virgin Money, Santander and Aldermore Bank are all expected to join the scheme sooner or later.
Unlike the first scheme, the government does not take an equity stake in your home and you don’t have to pay the government anything if and when you sell. You cannot use the scheme to buy a second home or a buy-to-let property.
It is important to note that, while you can apply for a mortgage under the scheme now, the money won’t actually be available until next January. In other words, you can go ahead with a purchase, but your entry date will have to be next January at the earliest.
The next step: If you want to take advantage of this version of Help to Buy, your next best step is to find a lender taking part in the scheme.
For first time buyers
Both schemes could help first time buyers. Crucially, they should enable those without family financial support to buy their first home in a way that has not been possible since the onset of the credit crunch. For many tenants, this could offer a realistic opportunity to move out of rented accommodation for the first time. Which scheme you prefer really depends on whether you want a new build home or not. Bear in mind that the 20% contribution by the Scottish Government under Help to Buy 1 does not attract interest, so your total mortgage payments will be lower. But a share of your home will belong to the government.
Arguably, these schemes are as important for people aspiring to move up the property ladder as they are for first time buyers. Both schemes provide a way for those with some equity in their existing homes, but not enough for a 15% – 20% deposit, to buy a larger home. I suspect that this is the case for many homeowners who are currently stuck in a home that does not suit them because the equity in their home is not enough to provide the relatively large deposits required by lenders.
Say, for example, you currently have £15,000 equity in your home and you want to buy a property worth £200,000. Without Help to Buy, that property would be out of reach because the deposit necessary to obtain a mortgage will be in the region of £30-40,000 (i.e. 15-20%). But a 95% mortgage would mean that you only needed a £10,000 deposit, giving you enough equity to move home.
Whichever scheme you choose, you will have to sell your existing home in order to qualify.
Both the UK and the Scottish governments have been at pains to emphasise that normal affordability criteria will apply. In other words, you have to be able to show that you can afford the mortgage repayments in order to qualify. You will not automatically obtain a 95% mortgage just because you have a 5% deposit.