Hammond believes the purpose of the Help To Buy scheme was to increase confidence in mortgages, because in 2014 (when Help To Buy was introduced) lenders were very reluctant to offer mortgages with a Loan To Value (LTV) of more than 90%. The Help To Buy Guarantee scheme means buyers only need to put up 5% of the mortgage deposit while the government will provide a guarantee for a further 15% so that buyers can get a mortgage with a LTV of 80%. However, since 2014, many more lenders are offering 95% LTV mortgages, which is the justification Hammond has in scrapping the scheme.
That means it’s your last chance to apply for a Help To Buy Guarantee scheme! But it doesn’t mean you definitely should. There are several factors to consider if you’re still on the fence.
One of the main objectives of the Help To Buy scheme was to make it easier for first-time buyers to buy a property. First-time buyers are usually young so have less capital, and the eligibility for the scheme reflects that. Help To Buy can only be used on properties that are valued at less than £600,000 and households must have an income of less than £60,000p/a. Buyers can’t be in a position where they can afford a much larger LTV percentage for the deposit, but they do need to be able to afford the minimum deposit (5%). And that’s before you’ve gone through all the normal approval checks involved in getting a mortgage.
Since the Help To Buy scheme was designed for first-time buyers, you can’t use the scheme to increase your property portfolio. That’s exactly the kind of thing they wanted to avoid. If you’re looking to rent out your property then you are ineligible for Help To Buy. However, just because the scheme is designed to help first-time buyers, it doesn’t exclude you automatically if this isn’t the first property you are purchasing. Your current property simply needs to be in the process of being sold.
You can expect to be scrutinised thoroughly about your ability to manage repayments – much like you might be when getting a mortgage anyway. If the interest rate suddenly rises, therefore increasing the interest you have to pay on your mortgage, will you be prepared for it? A 95% LTV mortgage will be more expensive than a mortgage with a higher deposit of 20% to 40%, but due to the reduced risk offered by the government guarantee, you can expect a cheaper mortgage than if you got a 95% LTV mortgage without the Help To Buy Guarantee scheme.
Before the Help To Buy Guarantee scheme even began, another Help To Buy scheme had already been introduced. This was the Help To Buy Equity Loan, and this will still be valid until the end of 2020.
The Help To Buy equity loan works in much the same way as the guarantee does, with some significant, potentially expensive differences. The customer puts up 5% of the deposit, and the government will put forward a further 20% of the property value in the form of an equity loan. The benefit of this is that with a LTV of 75%, the mortgage rate will be much cheaper. Also, the equity loan will not charge or add interest for five years, giving the buyer time to sort out their finances after the purchase.
It’s not all great news, though. Once the five years are up, the interest on the loan will increase every year, starting out low but potentially getting very high over time. It’s also a loan against the equity, meaning that the government technically owns a percentage of your property. If the value of the property rises, you will need to pay back more. You can, however, pay back some of the equity loan before the end of the five years, so that, when you do start paying interest, the debt isn’t as high.
All the same eligibility restrictions apply to equity loans as they do to guarantee loans, too, so no renting out or properties over £600,000 allowed.
If you are in a position where you are looking to move into your first property and you fit the criteria for the Help To Buy Guarantee scheme, then it’s definitely worth considering. However, buying a property is a huge decision, and considering the time limit, you may not want to rush through your decision in order to get it. If you miss the guarantee scheme, the equity loan scheme is probably still favourable to getting a 95% LTV mortgage, but this will depend on your specific circumstances. If you contact us, we would be glad to help you in finding the most affordable, best value mortgages for your situation.