Help-to-Buy scheme: Can it help you?

Stage two of the Help-to-Buy mortgage scheme is about to be announced within the next couple of days, according to David Cameron, but what does it mean to potential home buyers?

The scheme was originally announced by George Osborne back in March’s Budget, and it is an effort to get banks and building societies to offer mortgages to buyers who only have small deposits, on homes costing up to £600,000.

Photograph: Oli Scarff/PA

Photograph: Oli Scarff/PA

Stage one of the scheme started in April, where first time buyers, or homeowners who wanted to move into a new-build house or flat, were allowed to borrow 20% of the value of the property from the government. As these loans were interest free for three years; all the potential buyer then required was a deposit of 5% and a 75% mortgage.

Now that stage two is about to begin, how is it different from the first stage?

Well, now where buyers only have a very small deposit of 5% or less, the taxpayer will front upto 15% of the property’s value, to lenders who want to give a mortgage of 95%, but don’t want the risk of the total 95%. They can ‘buy’ a guarantee from the government for up to 15% of the loan, which allows them to claim on the guarantee if the property is ever repossessed and sold at a loss.

It was thought that the second stage would launch in January 2014, but the government have now announced that they are bringing the start date forward, in an attempt to revitalise the Treasury and the UK’s economy.

So how does it actually work in practice? Well, say a buyer takes out a mortgage on a property costing £100,000, the buyer would provide a deposit of £5,000 and the lender would then take out a guarantee for £15,000, which is 15% of the property’s value, with the government.

Then, if the lender subsequently has to repossess the property, and the house is sold for less than £100,000, the deposit is gone, and the lender would get back £14,250, which is the 15% of the loan covered by the guarantee, less a 5% cut. The remaining loss is taken on by the lender, but without the guarantee they would have lost a lot more.

However, there are some catches to the guarantee, for instance, it is only valid for up to seven years after the mortgage is taken out, and the guarantee does not hold if the value of the property falls and goes into negative equity, it is only valid if the borrower falls into payment problems and defaults, and the home is repossessed.

And not every bank or building society will offer it, as only three have signed up to the scheme so far; these are Royal Bank of Scotland, NatWest, and Halifax.

Those eligible will be first-time buyers and movers, but they’ll need to prove that they can afford the mortgage repayments and as a credit check will be performed, they should have a good credit score. The scheme is not available to those wishing to buy a second home, and those wishing to apply to the scheme will have to sign a declaration stating that they do not have a second home.

For more information, visit Gov.uk