Since the credit crunch both the Government and the Bank of England have taken significant steps to protect and kick-start the housing market.
From keeping base rate at 0.5% for four years, to the NewBuy Scheme and then the Funding for Lending Scheme, both existing homeowners and prospective first time buyers have had significant help over the past few years.
After an initial dip in house prices of around 20%, the market has actually been reasonably stable, at a time when further falls could have been expected, indeed both house prices and the number of mortgage approvals have risen over recent months. However, the Government clearly believes more needs to be done and in his Budget earlier this year, the Chancellor, George Osborne, announced a radical plan, the ‘Help to Buy’ scheme.
We’ve pulled together everything you need to know about the Help to Buy scheme.
How will the Help to Buy scheme work?
There are to two parts to the scheme.
Firstly, for those people wanting to buy a new build property, up to £600,000 in value, the Government will offer a shared equity loan of up to 20% of the purchase price, with the borrower putting down just 5%.
The shared equity loan will be interest free for up to five years, from the sixth year onwards borrowers will pay an annual fee of 1.75%; with this fee rising by 1% above the Retail Prices Index (RPI) each year thereafter.
The Government will make £3.5 billion available for this part of the scheme, with borrowers repaying the shared equity loan when the house is sold.
Because these will be shared equity loans the Government will benefit from any increase in the value of houses bought under the scheme, of course they will also have to foot the bill for any losses if house prices fall over the longer term.
In the second part of the scheme the Government will guarantee up to 15% of the mortgage where the borrowers puts down a deposit of 5%. By guaranteeing 15% of the amount borrowed the Government hopes that this will encourage lenders to increase the loan to values they offer on their mortgage loans; effectively the borrower will get a 95% mortgage but the bank has the risk equivalent to an 80% loan.
The government support up to £130 billion of mortgages via this part of the Help to Buy scheme and it will be available for both new build and existing properties.
The second phase of Help to Buy was not due to start until January 2014, however the Government has now announced applications can be made from 7th October 2013, although the loan cannot complete until the start of 2014.
Unlike previous schemes, which were often only open to first time buyers the Help to Buy scheme will be able to support both existing homeowners who want to move and also first time buyers wanting to get onto the housing ladder.
The Help to Buy scheme will be open to all, irrespective of their income.
Are there any restrictions?
The Help to Buy scheme will only be available for the purchase of homes up to £600,000 and won’t be available for buy to let investors to use. The scheme will also not be available for people who want to buy a second home.
When will it start?
The shared equity loan component will be introduced from 1st April 2013.
Borrowers who want to benefit from the Government guaranteeing up to 15% of their borrowing will have to wait until the start of 2014 to complete their purchase, although applications can be made from 7th October 2013.
Why is the Chancellor introducing the scheme?
Whilst a combination of low interest rates, various other initiatives such as the Funding for Lending scheme, a slow economic recovery and falling unemployment, have helped to underpin the housing market and help avoid bigger house prices falls, it is clear the Government thinks more needs to be done.
According to the estate agent, Savills, the shared equity loans could help finance up to 75,000 purchases over the next three years, with the mortgage guarantees potentially assisting a further 600,000 over the same period of time.
The Chancellor clearly hopes such a radical scheme will help boost the housing market and therefore the wider economy, more cynical people would also say he had one eye on the 2015 election!
What has the reaction been?
As with any major announcement the devil is in the detail and reactions were mixed when the scheme was launched.
George Osborne said the introduction of the Help to Buy scheme was a “great deal for homebuyers.”
Mortgage lenders were unsurprisingly enthusiastic, with Stephen Noaks of Lloyds saying: “We believe that the mortgage guarantee scheme will give a much-needed boost to the housing market and, most importantly, address the issue of accessibility.”
He continued: “Crucially, this scheme will not only help first-time buyers, but also second-steppers,” he added
However, although being broadly in favour. Simon Rubinsohn of the Royal Institution of Chartered Surveyors struck a note of caution, saying: “The government needs to be careful this doesn’t create another housing bubble – pushing prices up at the expense of buyers.”
The Council of Mortgage Lenders was also cautious: “Without capital relief, and depending on the size of the fee, the cost of the commercial fee that lenders will have to pay to gain the benefit of the scheme could make the scheme uneconomical.”
Following recent price increases, there is also concern that Help to Buy may fuel another house price bubble, actually making it harder for people to buy their first home or move up the ladder. However, many housing experts reject this theory, arguing that the national figures are skewed by a buoyant London property market.
Want to know more?
As more details are revealed we’ll be updating our website.
If you think the Help to Buy scheme may help you and would like more information simply send an email to firstname.lastname@example.org putting ‘Help to Buy’ in the subject heading and we’ll make sure you are the first to know about all the latest developments.
If you would like advice on your options or have a question about Help to Buy please us oday on 0115 933 8433, alternatively enquire online.
Your home may be repossessed if you do not keep up repayments on your mortgage.
For providing mortgage advice we will charge an application fee of £300 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.