How does Help To Buy work?

mortgage house business©iStock.com/AlexRaths

THE Help to Buy scheme was introduced by the Government in April 2013 in order to help more people get onto the housing ladder, giving them the chance to do so with just a 5% deposit.

With house prices continuing to rise, the scheme was always going to be popular - by mid 2015 it had been used to arrange 112,803 mortgages - although there are concerns that it has in some ways helped push property prices up even further.

From December 2015, Help to Buy ISAs will also give people saving for a deposit a little more help, in the form of 25% extra money on top of their own savings, tax free.

Meanwhile, those who live in social housing in England have also been given more of an opportunity to buy their own place some day, with the expansion of the Right To Buy scheme to include housing association tenants.

Quick look
Help to Buy - equity loans and mortgage guarantees
Right to Buy extended
Help to buy ISAs - a quick guide

Here then, we take a look at how each of the schemes works - keep reading to get an overview or skip ahead using the links on the right.

Help to Buy scheme

There are two parts of the Help to Buy (HTB) scheme: the equity loan element and the mortgage guarantee element.

Equity loan

Equity loans are aimed solely at helping people who want to buy a new build property. First-time buyers can apply, as well as those climbing to the next rung of the property ladder.

They work like this: if potential buyers can find a deposit of at least 5% of the property's value, the Government will lend them up to 20% of the property's value. The remaining 75% would be borrowed as a mortgage.

So, for example, someone wanting to buy a home worth £150,000 would need a deposit of at least £7,500.

The Government would then lend them £30,000 as an equity loan, and the buyer would apply for a mortgage to cover the remaining £112,500.

Eligibility

Equity loans can only be used for newly built properties worth up to £600,000 in England. Different versions of the loan are available in Wales and Scotland, and apply to properties worth up to £300,000 and £400,000 respectively.

Help to Buy...
...in England
...in Wales
...in Scotland
...in Northern Ireland

Each scheme has its own criteria on further eligibility, but in England the help comes with the conditions that the property mustn't be sublet, or bought as part of a part exchange deal on the old home. Applicants also mustn't own any other property when they buy their new home.

Further details on eligibility and how to apply for a loan are available from each home nation's housing executives - see the links above - and from local Help to Buy agents.

Loan fees

Equity loans are interest free for the first five years. In the sixth year, the Government will start to charge an admin fee, starting at 1.75%.

This will increase every subsequent year in line with inflation as measured by the Retail Price Index, plus 1%.

These percentages might seem low, but remember that the fees will be in addition to the mortgage repayments you'll be making.

The loan itself must be repaid after 25 years, or when the mortgage finishes, or when the house is sold.

Repaying the loan

The size of the loan repayment depends on how much the property is sold for.

Say a house was initially bought for £150,000. We would have had to find £7,500 for the deposit, and the Government would have loaned us up to 20% of the value - equivalent to £30,000. We would then have taken out a mortgage for £112,500.

Should we then sell that house for £200,000, we'd be entitled to the money we've invested plus a share of the "profit" - and so is the Government.

So we'd get back our deposit of £7,500, plus the mortgage value of £112,500. We'd also get our share of the "profit" resulting from the sale. In this case, that's 80% of the £50,000 increase in the value of the house, which is £40,000.

In total, we'd get £160,000.

The Government, meanwhile, would get the remaining 20% of the profit - in this case £10,000 - plus the original £30,000 they lent us as a loan. They would therefore be entitled to £40,000.

If, however, the value of the home has fallen when it comes to sale, we'll pay back less than we initially borrowed.

Those who wish to repay the loan early can do so. Repayments must be paid as instalments of either 10% or 20% of the loan's total value.

Mortgage guarantee

The mortgage guarantee element of Help To Buy involves the Government acting as guarantor for us to the mortgage lender for up to 15% of the value of the mortgage.

This makes lenders much happier about providing mortgages to people with smaller deposits - as little as 5% - as they'll still be able to reclaim their money if the borrower defaults.

If, for example, we have a 5% deposit toward a £150,000 house, the mortgage guarantee means that the Government will cover up to £45,000 of the mortgage should we fail to repay it.

It doesn't, however, mean that the Government is contributing to the mortgage.

With a 5% deposit, it's the borrower who is paying the whole value of the mortgage, worth up to 95% of the property value - which, in this case, is £142,500.

Compared with an equity loan, therefore, the monthly mortgage payments will be higher. But homeowners stand to benefit more when they sell the property or finish repaying the mortgage, as the Government aren't entitled to any of the proceeds.

Eligibility

Mortgage guarantees can be used to buy properties worth up to £600,000, wherever they are in the UK.

Unlike the equity loan, the mortgage guarantee can be used for both new and old properties.

As with the equity loan scheme, the mortgage must be of the repayment variety: interest only mortgages are excluded. But in addition to that condition, offset and guarantor mortgages aren't acceptable either.

The mortgage guarantee scheme is offered by mortgage lenders across the UK - look out for the Help to Buy logo displayed by participating lenders.

Right to Buy

The Government are also making it easier for public sector renters in England to buy their homes.

In May 2015, Chancellor George Osborne announced the "extension of Right to Buy" in England to include housing association tenants.

Prior to the changes, only people renting from the council, armed services or NHS and Foundation Trusts had a right to buy their homes.

It's thought that around 1.3m housing association tenants will be eligible to buy their home at a discounted price - provided that they have been there for at least three years.

Discounts can be as much as 70% or as little as 35%, but the monetary value of any saving will be limited to a maximum of £77,900 outside London, and £103,900 in the capital.

Only in England

As mentioned above, the Right to Buy scheme only operates in England. Scotland rejected the extension of the scheme and plans to phase it out entirely - which Wales have already done; both are keen to keep hold of public housing stock.

In England, however, Right To Buy forms part of the Government's Housing Bill, which also requires Local Authorities to sell off their most expensive council houses when they become empty.

Under the terms of the Bill, these are supposed to be replaced by new-build homes using the money from the sales.

The Government say this will increase the number of houses available on the market - both old and new. But this isn't really happening: the National Housing Federation (NHF) say that only 46% of the homes sold off since 2012 have been replaced with new housing.

In July 2015, figures from the Office of National Statistics (ONS) showed that at 0.8%, growth in private building work was the slowest since March 2013.

Help to Buy ISA

This lack of available housing is one of the principle reasons for rising house prices - and the increasing difficulty of saving for a deposit.

The deposit is a percentage of the overall property price - and saving enough for even a minimum deposit can seem a mammoth task.

According to Halifax, the average price of a home in the UK at the time of writing is £204,674.

If we assume that lenders will lend us 95% of the property's value, this means that the average deposit is £10,233 - a hefty sum given that workers have seen their real pay fall every year since 2008.

So to help encourage people who could otherwise find themselves just short despite their best saving efforts, the Government is introducing a Help To Buy Isa.

How does it work?

The Help To Buy ISA is available only to first-time buyers purchasing a home that they intend to live in, with a value of up to £450,000 in London, and up to £250,000 elsewhere in the UK.

In brief, the Government will top up savings in the ISA by 25%, all tax free. Savers are allowed to put by up to £200 a month, which would be topped up by £50.

Those opening one of the accounts should be aware that they can also make a maximum opening deposit of £1,000, before putting in that month's regular sum; that initial deposit will be eligible for the 25% top up as well.

The minimum people need to have saved to qualify for the 25% bonus is £1,600; the maximum savers can earn in bonuses is £3,000. This would require saving £12,000, and would take four and a half years.

It's worth noting that the Government top up isn't paid out until the buyer puts down a deposit, and it will go straight to the mortgage lender.

Restrictions

Anyone who's already paid into a Cash ISA within the tax year can't take out a Help To Buy ISA until the following April; savers aren't allowed to subscribe to both in the same tax year.

However, for those with less than £1,000 in an existing cash ISA there is the possibility of transferring it into a Help To Buy ISA - because, as mentioned above, savers are limited to a maximum £1,000 opening deposit.

Also bear in mind that while we can have as many cash ISAs as we want, opening a new one every year, those who are eligible to open a Help To Buy ISA can only open the one.

But should both members of a couple be first time buyers, they can each open one, effectively earning themselves a free £6,000 if they each manage to pay in the maximum allowable amounts.

The accounts will be available from December 1st 2015 until autumn 2019; they're expected to be offered by a range of banks and building societies.

At the time of writing that list includes Santander, NatWest, Nationwide, Barclays, Lloyds Banking Group, Virgin Money, Halifax, Leeds Building Society and West Bromwich Building Society.

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