Help to Buy scheme: how does it work?

Saving up to buy your first home can be a daunting process.  Property prices have risen considerably faster than incomes, so much so, that first-time buyers are struggling to find the deposit, even to qualify for a mortgage.

It is for this reason that the government set up the Help to Buy scheme in 2013 – to help people get onto the property ladder more easily.

The treasury says that over 495,000 English homes have been brought through the scheme, but what does it involve?

What is the Help to Buy scheme?

The government’s Help to Buy scheme consists of two main forms: Help to Buy loans and Help to Buy Individual Savings Accounts (Isas).

Help to Buy loans

In the Help to Buy loans, the government offers the buyer a loan of 20% of the cost (40% in Greater London) towards a newly built property. This means that, instead of either having to find 25% as a deposit, or negotiate a 95% mortgage, buyers only need a 5% deposit and a 75% mortgage to buy it.

Though principally targeted at first-time buyers, this is available to anyone who wishes to buy a new-build property as their primary home. It only applies to properties below a set value — this is £600,000 in England and less in other parts of the UK.

For example, if you were buying a house for £200,000, you would only need to find a deposit of £10,000 (5%) and arrange a repayment mortgage for £150,000 (75%). The remaining £40,000 (20%) would be covered by the Help to Buy loan.

Repaying the loan

The Equity Loan is not repayable until you eventually sell the house, although you may choose to repay it early. For the first five years, you pay nothing but an annual management fee of £12 – after which you start paying the interest.

This is currently set at 1.75% per annum for year six, after which it will rise by 1% of the interest amount plus inflation based on the Retail Price Index (RPI). In other words, on your £40,000 loan, you would pay £712 for year six (including the management fee). For year seven, this would increase to £719 + RPI (1.75% + 1% increase + RPI).

If you sell the property for £210,000, for instance, you would receive £168,000, from which to repay what was left of the mortgage, and you could use the remainder as a larger deposit for your next home. You would repay 20% of the sale cost, which would be £42,000.

Help to Buy: ISA

The Equity Loan is the most significant offer which the government makes under the Help to Buy scheme, but there are others.

The Help to Buy Isa was launched later, in December 2015, and is open to first-time buyers in the UK. This is available from a range of banks, building societies and credit unions.

With a Help to Buy: ISA, the government will contribute 25% of what you save yourself, as long as you have deposited at least £1,600 in the ISA. The maximum they will contribute is £3,000 – if you save £12,000.

A Help to Buy: ISA is available to each first-time buyer, whether they are buying on their own or jointly. Therefore, if you are planning to buy with a partner, you could each have a Help to Buy: ISA and therefore receive up to £6,000 from the government between you.

The government bonus will be paid when you are buying your home, and must be requested by your solicitor, to be included in the consolidated funds for completion. For this reason, the bonus cannot be used for your deposit.

Shared Ownership

If you are unable to afford a mortgage for the full price of a property, you have the option of the government’s Shared Ownership scheme. Under this, you can buy a share of the property (anywhere between 25% and 75%) and rent the remainder, with the option of increasing your share later.

To qualify for this scheme, you must not currently own a property. The only exception is if you are already in a Shared Ownership arrangement and wish to move. In addition, you must have a total household income of less than £80,000 (£90,000 in London).

A variant of this scheme is the Older People’s Shared Ownership scheme, available to people from 55 upwards. This works in much the same way, but with a maximum cap ownership of 75%. At this percentage, you are not required to pay rent on the remaining 25%.

Help to Buy: Good or Bad?

While no financial scheme is entirely without risks or drawbacks, the Help to Buy scheme generally offers support to those who dream of owning their own home and want to take the first steps on to the property ladder.

To summarise, the advantages of the scheme include:

• help to buy a home
• lower deposit required
• interest-free borrowing for five years
• cheaper mortgage rates available
• competitive interest rates after five years.

The future of the scheme

The current Help to Buy scheme runs out in 2023, and the government is understood to be reviewing whether to continue it and in what form. There may well be some comparable scheme after then, but there is no guarantee that it will offer as favourable terms.

So, if you or your children are hoping to buy a home for the first time in the near future, now is the time.

At Osborne Morris & Morgan we understand that moving home can be one of the most exciting times of your life. Yet at the same time, it can also be one of the most stressful. To ensure your house move proceeds as smoothly as possible, it’s important to use expert Conveyancing solicitors to guide you through the process.

Contact our expert Conveyancing solicitors today for a free quotation, or for information, on 01525 378177, or online.