help-to-buy

HELP TO BUY MORTGAGES FOR CONTRACTORS AND FREELANCERS

GUIDE TO THE HELP TO BUY SCHEME

Back in April 2013 the Chancellor announced the largest government housing initiative since Margaret Thatcher’s ‘Right to Buy’ Scheme in the 80’s. The aim of the scheme is to give the housing market (and by extension the economy) a much needed shot in the arm.  The scheme sets out to do this through two complementary policies that have been put into motion with the aim of helping prospective house buyers who have managed to raise deposits of 5% – equity loans for new build properties and mortgage guarantees for house purchases. For many lenders and on many properties 5% is not enough of a deposit to secure a mortgage so the government has said it will increase people’s deposits (through loans or guarantees) up to 20% of the value of the property, provided the property costs no more than £600,000.

Of course the first thing most people want to know is whether they will qualify for the scheme. And on the whole, the answer will be yes. The scheme will be open to anyone who wants to borrow money to either buy a new-build home or to purchase a new home up to £600,000. However, there are some caveats; for example if you are looking to buy a second home or a buy-to-let home then you will not be permitted to get a loan via the Help to Buy Scheme. Similarly if you are a foreign buyer with nor credit history whatsoever you will not be able to take advantage of the scheme.

 

EQUITY LOANS

When it comes to the Help to Buy Scheme equity loans are loans that are specifically intended for those people who are intending to buy a new-build property. They work in the following way: firstly, you would need to raise five percent of the cost of the new-build property yourself for a deposit. Then the government would loan you a further 20% of the cost of the property. Finally, you would need to arrange a mortgage for the remaining 75% of the cost of the property to be built. On a £200,000 house this would mean finding a £10,000 deposit yourself, receiving a £40,000 loan from the Chancellor and the Help to Buy Scheme and getting £150,000 mortgage from a bank or mortgage lender. The advantages of the scheme for the buyer are clear. With a much larger deposit, guaranteed by the government, the banks and other financial institutions are far more likely to give you a mortgage and to give it to you at a better rate of interest. And when it comes to paying back the loan, the news gets even better. For the first five years of the equity loan the outstanding debt will be interest free. After the sixth year there will be an admin fee to pay which will start at 1.75% of the loan and this will then increase year by year according to the Retail Prices Index plus one percent. At that point it could become quite costly, as you would be paying all of these fees on top of your mortgage so it is worth trying to pay it off early. Regardless, the government’s equity loan must be paid back in full after 25 years or at the point you sell your home, whichever comes first. At that point you would be paying back the market value of the loan and not the precise amount you borrowed. So, if you bought that £200,000 house mentioned above and took a £40,000 loan through the Help to Buy Scheme and when you came to sell the house was now worth £250,000 you would then need to pay back 20% of the £250,000, or £50,0000. On the other hand, if the property had gone down in value, you would need to pay back less than the amount you borrowed.

MORTGAGE GUARANTEES

The mortgage guarantee scheme works in a similar way to equity loans although you don’t actually borrow any money directly from the government. If you are buying a house (not a new-build) and have managed to raise the 5% deposit, the government will now, through the Help to Buy Scheme guarantee any mortgage borrowing that you make that is above 80% of the value of that property. In other words the government is giving banks and other lenders a guarantee of 20% of the property and if something goes wrong, they will cover the lender for that 20%. Once again this helps buyers as it makes lenders far more willing to give buyers a mortgage at a fair rate of interest even with a smaller 5% deposit. It works in the following way; firstly, the buyer would put down 5% deposit on the value of the house they wish to buy. The lender would then offer them a 95% mortgage, knowing they are intending to take advantage of the scheme. The government would then present the lender with a guarantee to pay back anything above 80% of the loan in the event of a default on the loan. Unlike the equity loan schemes this all goes on in the background and the borrower does not deal directly with the government. And unlike the other scheme your debt is solely with the lender and not with the government and you must pay back the entire loan to the lender according to their terms. If you do not your house will be repossessed.

CONTRACTORS AND THE HELP TO BUY SCHEME

Finally, it is worth looking at how this scheme applies to contractors. As mentioned above, the scheme is open to anyone so contractors and contractor specific mortgages can use it too. Consequently if a contractor mortgage broker is talking to lenders on behalf of a contractor they can do so in the confidence that 20% of the value of the property will be covered already, either through the mortgage guarantee scheme if it is a house purchase or through an equity loan if it is a new-build. The only fly in the ointment for contractors might be if new-build companies try to force purchasers to use their own ‘approved’ mortgage brokers (as has happened many times already). This is a situation that everyone should avoid at the best of times but contractors doubly so. That’s because standard mortgage lenders rarely have the experience or contacts to handle contractor mortgages and are more likely to fall back on the same old tired cliche of contractors being less ‘reliable’ or having a less ‘steady’ income. They will categorise them simply as ‘self-employed’ and then try to assess their worth simply through pay-slips or trading accounts, missing out on large portions of their earnings value and worth. It is for this reason that most contractors have traditionally gone to contractor friendly mortgage brokers and they should continue to do so when applying through the Help to Buy Scheme.

YOUR QUESTIONS ON HELP TO BUY ANSWERED

The government’s Help to Buy Scheme is now in full flow and has already been adopted by tens of thousands  of prospective house buyers across the UK. And whilst in many cases it does seem to be fulfilling its aim of helping people to get on the housing ladder who can afford mortgage payments but cannot afford a large enough deposit, its critics point out that a significant number of people taking advantage of the scheme are people getting help buying £600,000 houses (for example bankers in the city). Nevertheless, it’s here and for people who want to buy a house and who don’t have enough deposit it is undoubtedly incredibly useful. This article will try to answer a number of questions people might have about the Help to Buy Scheme.

What Exactly Is The Help to Buy Scheme?

In truth there are actually two separate schemes under the Help To Buy umbrella. The first part is aimed at helping those people who want to buy a new-build home and the second part is for those people who are looking to purchase a house in the traditional way. They both work in a similar way although there are some slight differences in how they operate.

Hasn’t The Help To Buy Scheme Been Going For A While Already?

Yes. The first part of the scheme relating to New Build projects was launched in April 2013. The second part, relating to the purchase of existing housing was scheduled for January 2014 but has now been brought forward meaning as of November 2013, Help to Buy Mortgage products are available.

How Does Part One of the Scheme Work?

For those people who wish to purchase their own new-build property, the first half of the scheme, launched in April 2013, is the relevant route. This offers people who have managed to save 5% of the cost of their new build house a boost by increasing that deposit to 20% on any property up to a value of £600,000. This is achieved through an equity loan which operates in the following way: If your new house costs the full amount (£600,000) then you would need to arrange a mortgage for 75% (£450,000) of that £600,000. Of the remainder, you would then need to find a deposit of £30,000 yourself (5%) and the government would add £120,000 to that (15%). As a buyer this is of course a massive boost, allowing people quicker access to a wider range of properties. In addition, the repayment terms are also very favourable, with the first five years of the equity loan being free of any interest. Thereafter people will have to pay back an admin fee (set at 1.75%) which will go up every year at the rate of one percent over the Retail Prices Index. It must be paid back within 25 years or when you the house is sold. Furthermore, if it is paid back at the point of the sale of the house the final payment will be linked to the value of the house. So if the market value of the loan has gone down, so will the final payment. Similarly if the loan value has gone up, so will the amount owing. There is approximately £3.5 billion available and it is estimated that this part of the scheme will fund about 75,000 new homes.

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How Does Part Two of the Scheme Work?

The second half of the scheme is aimed at those people who are also looking to buy a house but don’t want to build one. Prospective house buyers can now take advantage of a mortgage guarantee scheme in which the government will provide a guarantee to lenders for anything up to 15% of the value of the loan being taken out against a given property. As with the first part of the scheme this covers any property with a value up to £600,000 and means that buyers can now purchase properties once they have raised a deposit of 5% – thereby giving them access to a much broader selection of mortgage products on the market. This part of the scheme applies to all kinds of properties, not just new-builds. It helps lenders because it means that should a borrower end up defaulting on their mortgage the bank will suffer reduced losses – and this in turn means that they are able of offer those cheaper, lower deposit mortgages to their customers.

What Kind of Loan Does Part Two of the Scheme Offer?

Unlike the first half of the scheme there is no direct loan from the government, rather a guarantee to cover a percentage of your mortgage. As long as people are able to raise that first five percent themselves the government will step in and offer a guarantee to the lender that 20% of the loan will be covered in the event of any problems. For a lender this means the can start lending to more people once again (after having tightened their belts post credit-crisis) safe in the knowledge that they aren’t taking on as much risk. For a buyer, as mentioned above, it means that they are more likely to get their mortgage approved as they will have an effective deposit of 20% and they will therefore be able to access a much broader range of mortgage products. Unlike the first part of the scheme they will not have two loans, just the one with their mortgage provider and their entire debt must be repaid to that lender.

Who Is Eligible for the Two Schemes?

Anyone who is resident in the UK and looking to buy a house or to build a new house. Foreign buyers with no credit history will not be eligible, nor will those people who wish to buy a second home or a buy to let property.

Can Everyone Borrow the Full Amount?

Technically anyone (of those people who are eligible for the scheme) can borrow up to the full amount, but the banks and lenders will still (quite rightly) be applying strict criteria on the amount being borrowed. This means that in all likelihood peoples’ loans will be limited to a maximum of five times their earnings (either their sole earnings or the joint earnings of themselves and their partner) and with restrictions placed on the amount they need to have left at the end of each month. These restrictions mean, in effect, that borrowers will still need to make sure that proposed mortgage payments do not go over 55% of their income (after tax).

What Interest Rates Will Need to Be Paid?

This will of course vary but at the time of writing their are a number of fixed rate mortgages set at 4.99% (for two years) and one or two at the slightly higher 5.19%. These are the rates for 95% loans however. People who are able to come up with larger deposits can still access much better deals. Additionally one lender, the Cambridge Building Society, appears to have undercut the Help to Buy Scheme completely, offering a 3.99% mortgage (rising to 4.89% after one year) to first time buyers with 5% deposit.
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What Happens If People Cannot Pay?

The same thing as if someone defaults on a normal mortgage. You will either be forced to sell the property of the lender will step in, repossess the property and sell it on your behalf (at less than it is worth). You will still be required to repay any equity loans outstanding to the UK government under the scheme.

Does the Help to Buy Scheme Offer Unlimited Loans?

No, the government has put aside enough money to fund a total of £130 billion mortgages, with £12 billion in loan guarantees and the scheme will be in place for just three years.

Is The Scheme Operating Across the UK?

Kind of. The Scottish government began a similar scheme in September 2013 and the Welsh government will soon be announcing their own version. In Scotland you are only able to purchase properties up to a value of £400,000.

Is Everyone In Favour of the Scheme?

Not exactly. Even the government’s Business Secretary, Vince Cable has expressed doubts and believes the scheme may simply set off another unsustainable house price merry go round, resulting in another dangerous housing bubble.

 

Could It Cause Another Boom and Bust?

The government says not, claiming they have put in place measures to ensure it doesn’t, such as barring offset and interest-only mortgages and refusing buy to let investors. They also point to the rigorousness of the eligibility checks which should deter reckless spending or lending.

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