Help to Buy scheme: How will it help first time buyers get a mortgage?

Plans revealed by Prime Minister David Cameron could help thousands of first time home buyers get onto the mortgage ladder. The ‘Help to Buy’ scheme, as it is known, is a flagship policy designed to assist people in buying their first property.

David Cameron

David Cameron: ©UK Home Office

The scheme, announced back in the March budget, and which is costing the government an estimated £15.5bn, is not available to people who already own their homes, or who are foreign purchasers. David Cameron clarified the policy to MPs today, saying that it was ‘for people’s only home’, and specifically designed to help people get onto the property ladder. The scheme will aid a generation of people who have, so far, been unable to afford a mortgage, for one reason or another. Cameron stated that this new policy will “support a new generation in realising the dream of home ownership”.

Problems arose however, when critics of the policy raised concerns that the scheme could easily be used for wealthier people to acquire a second home, or make it easier for immigrants to purchase a home, ahead of British nationals.

During PM’s questions in Parliament, Cameron refused to go into details but did say that it was down to the chancellor to iron out such difficulties in further announcements.

After the Labour MP, Seema Malhotra, asked the PM again about the scheme, Cameron was forced to reiterate that the policy was for first time buyers only. Malhtora said: “Last week, the prime minister could not confirm that taxpayers would not subsidise foreign buyers of property in the UK. Perhaps he can instead clarify whether his Help to Buy scheme will see taxpayers help fund purchases of second homes and holiday cottages?”

Cameron responded with: “First of all, this scheme is for people’s only home. It will have a mechanism in place to make sure that is the case. The second thing which is important is that in order to take part in this scheme you have to have a credit record in this country, so no it won’t do what she [Malhotra] said it would.”

So how does the scheme actually work? Well it consists of two elements; a loans scheme and a guarantee scheme. The loan scheme, which came into effect on April 1st 2013, applies to people buying a house for up to the value of £600,000. For all those who qualify, they will be eligible for an equity loan worth up to 20% of the value of the property, which is funded by the government. This loan will be interest free for the first five years, but buyers have to raise a 5% deposit. In the 6th year, buyers will be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year. The increase is worked out by using the Retail Prices Index plus 1%.

©www.gov.uk

©www.gov.uk

The guarantee scheme, which takes effect from January 2014, is available on any new or existing properties. The government will provide the mortgage lender with a guarantee for up to 15% of the loan, however, the buyer must have raised at least 5%, but no more than 20% themselves.

In both schemes, the home will be in your name, which means you have the right to sell it at any time. You’ll either have to pay back the equity loan when you sell your home or at the end of your mortgage period – whichever happens to come first.

And if you like, you also have the option of paying back some of the equity loan without selling your home. There is the choice between paying either 10% or 20% or the total amount, so long as the loan is worth at least 10% of the value of your home.

Not everyone thinks the Help to Buy scheme is a good idea however, as Albert Edwards, a leading commentator in the City commentator, described the new policy as one of the most ‘stupid economic ideas of the past 30 years’. Edwards heads the global strategy team at Société Générale, and said that the only thing the scheme was achieving was artificially inflating property prices and driving young people deeper into “indentured servitude”.

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