Help To Buy vs Mortgage Market Review
With the property market hitting new heights with every passing month, Nicola Francis reviews the Help To Buy scheme and the recent changes to mortgage borrowing
Owning your very own piece of land is a lifetime achievement and one that in recent times has been getting further out of reach for most. Fifteen months ago, during 2013’s Budget, the Help to Buy scheme was introduced. The idea of the scheme in a nutshell was to help first time buyers and those who already owned a home but felt they could never move up the property ladder.
So how does the scheme work?
Under the scheme only a 5% deposit is required, as opposed to the usual 10%, making it that little bit easier to clear that first hurdle. The scheme’s help takes shape in two different forms;
1) Help to Buy Equity Loan – Under this the Government loans you up to 20% of the cost of a new-build home. Add this to your 5% deposit and it means you only require a 75% mortgage and this could result in smaller monthly mortgage payments. The benefit of this equity loan is that in the first 5 years there are no loan charges, from the sixth year onwards the fees start at 1.75 % of the loan’s value and then increase yearly based on the Retail Prices Index. The loan must be paid back when you sell your home or after 25 years of taking the loan, whichever comes sooner. How much you pay back also depends on the market value at that time, so if you sell your home for more than you bought it you could pay back more than you borrowed under the loan.
2) Help to Buy Mortgage – This part of the scheme was introduced in October 2013, earlier than expected, and is slightly different in that it can apply to both new-builds and older homes. The mortgage works in the same way as any other mortgage, however under the scheme the Government will guarantee some of the mortgage to your lender which is seen as added security for the lender allowing them to offer higher loan-to-value mortgages, for example a 95% mortgage. There are some conditions to the mortgage guarantee such as not being a shared ownership, not being a second home and not letting out the property once purchased.
The Help to Buy scheme has had its fair share of criticisms. The scheme helps to purchase homes up to a cost of £600,000. Some have therefore argued that this would allow well off people to buy bigger homes when the focus should be on affordable housing for those who are not in a position to even get a foot on the ladder. Others have said that supporting buyers would lead to an increase in house prices and create what many have termed a housing bubble. The latest UK house prices figures have seen an increase of up to 8%, and even 17% in London. Despite the scheme having some flaws you have to give credit to the Government for trying to help those who need it most in the property market.
However, what is given with one hand can also be taken away the other. At the end of April of this year, new stricter rules were implemented following the Mortgage Market Review. Borrowers, whether homebuyers or remortgagors, are facing much tougher checks and being asked to give much more detail about their spending habits. The reasoning behind this is that lenders are now fully responsible for ensuring customers can afford to repay their loans. Instead of affordability being based on income, lenders will now look at what customers will have left, taking into account other regular expenditure such as gym memberships and childcare costs. Customers will also be asked if any significant changes in income are to be expected such as changing to part time employment. Furthermore, lenders will also apply a stress test to establish whether customers will be able to continue to afford repayments if interest rates rise, typically to around 7%. The new rules could hinder the property market and dramatically lessen the number of buyers who rely on mortgages to fund their purchase. A very simple piece of advice highlighted by the Guardian; cut back those ‘extras’ and start living like a monk.
My advice; when embarking on your journey to get your very own piece of land, take the time to review all the help out there. I suggest also considering what the lenders will think your bank statements say about you as a person and reviewing whether there are any luxuries you can probably live without.
Lennons Solicitors have a thriving residential property department and are able to assist those buying property under the Help To Buy scheme. Contact any of our specialist property lawyers today on 01494 773377 or by email at firstname.lastname@example.org.