Help to Buy – The Mystery Unfolded

At the moment the hot topic is ‘government backed mortgage schemes’ with the buzz words being ‘Help to Buy’ I’m sure some of you have heard these phrases being thrown around. As a mortgage advisor it is my job to know what’s out there in terms of products and schemes. So when I decided to look in to these new schemes I underestimated how complicated and confusing they seem to be. It took me a while to get to the salient points and make some sense of the whole proposition.

As we are getting to the time of the year where you, our clients are at your keenest to talk mortgages and take action (whether that be moving, re-mortgaging or even buying for the first time), I thought I’d bring to your attention these much talked about government schemes, looking at what’s available,  how they work and points to consider.

So let’s start with Help to Buy. This is a government scheme that has come about in two parts the Equity Loan and the Mortgage Guarantee.

Equity Loan

• Available in England only.
• Released 1^st April 2013 and will be available for 3 years.
• Available to home movers and first time buyers wishing to purchase new build properties up to the value of £600,000.
• You require a minimum 5% deposit.
• A loan is provided of up to 20%.
• The loan and the deposit will cover 25% of the property and the remaining 75% will need to be covered with a repayment mortgage.
• The loan is interest and payment free for the first 5 years.
• After 5 years there will be a fee of 1.75% and this will increase annually according to the Retail Price Index (RPI) plus 1% on top.
• An annual statement is sent to you so you know what your monthly fees will be.
• The monthly payments do not repay any part of the original equity loan.
• The loan must be paid after 25 years or earlier if the house is sold, in the interim you are able to make partial repayments of a minimum of 10% market value.
• When you repay the equity loan, it needs repaying at the current value. E.g if you loaned 20% of the property value and you wish to repay 10 years later then you repay 20% of the property’s current market value which could be more than the original loan.
• You access this loan through your local Help to Buy agent and the mortgage through a mortgage lender or mortgage advisor.

When looking at this type of proposition you need to be 100% clear of what is required of you. Yes in the beginning you’re getting a 75% mortgage and only paying 5% deposit, great! Feels like good value for money doesn’t it? But think about the long term.

If your finances are stretched to maximum capacity each month ask yourself how are you going to pay those 1.75% fees? Even if you can manage the fees how and when are you going to pay the original loan off? Will it feel like such good value for money when you originally loaned 20% valued at £20,000 but have to repay 20% valued at £30,000 due to the value of your home increasing? That’s £10,000 more plus the fees you already may have paid for the privilege of having the loan. Worst case scenario is the value of your property drops then what, 20% may only be worth £16,000 but you are still required to pay back the initial £20,000, again not feeling so great then.

With no mandatory repayment method in place, you could find yourself unable to pay the debt for which you have a responsibility to, then what? Various financial penalties, being forced to sell and dare I say it, even repossession, possibly? Quite honestly, in my opinion this scheme is going to be suitable to very few people and with its complex and frankly risky approach it could well be the next Endowment scandal.

Mortgage Guarantee

• Available throughout the UK.
• Released October 2013 and will be available for 3 years, however the guarantees will not take effect until January 2014.
• Available to home movers, people re-mortgaging and first time buyers wishing to purchase new build and existing properties up to the value of £600,000.
• You require a minimum 5% deposit and maximum of 20%
• The government will act as a guarantor for you up 20% of the property value.
• You will require a repayment mortgage of up to 95%.
• Traditionally high loan to value mortgages haven’t been granted the same preferential interest rates as those mortgages of 75% and less due to the higher risk a lender is taking.
• As the government is guaranteeing a proportion of your mortgage this high risk is no longer there, so lenders are able to offer high loan to value mortgages at the same/similar rates as those of 75% and less.
• There is no additional government fee for the mortgage guarantee
• You access this proposition by going direct to a mortgage lender participating in the scheme or through a mortgage advisor who can do this for you.
• There are only a limited number of lenders within this scheme and they are: Bank of Scotland, Aldermore Bank, Halifax, RBS, HSBC, Natwest and Virgin Money.
• Other lenders are now willing to offer 95% mortgages, however there is no mortgage guarantee with these so beware.

In comparison to its counterpart ‘Equity Loan’ this is a relatively simple and much cheaper. There is no additional government fees for doing this and no fees that suddenly appear after a set period of time, no paying back more than you borrowed on loans to add to your initial deposit.

The guarantee is there primarily to safe guard the lender from the risk you as the borrower may pose. As the borrower you do benefit from the guarantee in terms of better interest rates and maybe more options than you would have had without the guarantee. You have to be aware that this guarantee does not absolve you of any responsibilities you would have had with a ‘normal’ mortgage. At the end of the day you have to make the repayments on time as and when they are due, if you don’t then the lenders will take action against you.

As an advisor I look at each case individually and assess it accordingly with the solutions being the most suitable to the client’s needs. However as is normally the way in life, the simplest option is often the better option.