Only the other day I read an article about the level of consumer awareness concerning the Help to Buy schemes and it seems awareness is mixed.
Let me explain the distinction between the schemes and why neither are a get a property “quick and easy” scheme.
Equity Loan vs Mortgage Guarantee
The government Help to Buy schemes aim to make mortgages available to people with small deposits. They fall into two categories; Equity Loan, which was launched earlier this year, and Mortgage Guarantee, which launched last month. The Government will loan you up to 20% of the value of your new home and incentivise lenders to make more mortgages available for people with smaller deposits.
The Help to Buy Equity Loan is for new build purchases only of up to £600,000. The government will loan you up to 20% of the value of your new home so long as you have a minimum deposit of 5%. The Government will then lend you 20% of the value of your new build property through an equity loan which can be repaid at any time within 25 years (or the term of the mortgage), or on sale of the property. The loan is interest free for the first five years with a fee of 1.75% from year six which will rise annually by RPI inflation plus 1 %.
The Help to Buy Mortgage Guarantee Scheme is aimed at existing property purchase and new build. Its aim is to increase the availability of mortgages for existing homeowners as well as first time buyers. Under this scheme a deposit of between 5% and 20% is required on a maximum purchase price of anything up to £600,000. The Government will provide guarantees to lenders on a proportion of the mortgage, which basically means if a borrower’s property is repossessed the Government will cover a proportion of the losses to lower the lender’s risk.
Lack of Consumer Awareness
The problem with the lack of consumer awareness is that there seems to be a misconception that the government is guaranteeing a portion of the borrowing it isn’t! Your home could still be repossessed if you fail to make the repayments. Likewise the schemes aren’t a guarantee of securing a mortgage either. You will still be subject to the strict criteria lenders demand.
So before you join the reported mortgage frenzy be clear what the schemes mean. With the equity loan you will have two loans; one with the government the other with the lender. With the mortgage guarantee scheme you receive no guarantee; it’s the lender who receives the guarantee.
Always check your eligibility!
Also check your eligibility. The schemes are open to existing home owners and first time buyers with a minimum deposit of 5% of the purchase price. Borrowing is from a participating lender and is available across the UK on newly built or second hand homes up to £600,000. The loan has to be for a residential property where you plan to live in it not rent out and must be your only property – so you cannot have an interest in any other property, anywhere in the world. The schemes are not available for buy to let landlords or second home owners.
So when you see marketing messages that proudly announce you only need a 5% deposit to own a home, just think about what that means. You won’t own the home you’ll have a massive 95% loan with little no equity. As always research your options and speak to an independent mortgage advisor about the best plan of action for your circumstances.
Franz Muehlthaler from Holroyd Miller Properties