Posted by John Yerou
on February 17th, 2015 11:38am in
Last Updated on November 12th, 2020 11:01am.
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Can contractors and freelancers get Help-to-Buy mortgages? The simple answer is: YES!
Help-to-Buy mortgages are available to most homebuyers in the UK (clarification in guide).
As an independent professional, you may find more competitive mortgages on the market. But if your credit rating is sound and you have 5% deposit, read on. These new borrowing options for contractors could get you onto the property ladder in a trice.
Table of Contents:
- Help-to-Buy: the government’s answer to the UK’s housing crises;
- Fair reasoning, but how was Help-to-Buy so shocking?
- Back to reality: the two types of Help-to-Buy schemes;
- So, what are the lending criteria for Help-to-Buy mortgages?
- Help-to-Buy: Equity Loan;
- Why does Equity Loan help you get a mortgage?
- Repaying the Equity Loan – crunching the numbers;
- Can contractors qualify for Help-to-Buy?
- Guide: Help-to-Buy FAQ;
- What exactly is the Help-to-Buy Scheme?
- Help To Buy isn’t new, is it?
- How does Part One of the Help-to-Buy (Equity Loan) work?
- How does Part Two of the Scheme (Mortgage Guarantee) work?
- Who is eligible for the two schemes?
- Can everyone borrow the full amount?
- What interest rates do borrowers incur?
- What happens if I cannot pay?
- Does the Help-to-Buy Scheme offer unlimited loans?
- Is the Scheme operating all across the UK?
- Are All Parties in Favour of the Scheme?
- Could Help-to-Buy cause another boom and bust cycle?
Help-to-Buy: the government’s answer to the UK’s housing crises
In April 2013, the Chancellor announced the biggest housing initiative since the 1980s. Margaret Thatcher’s ‘Right to Buy’ Scheme was the disruptor project back in the 80s. In 2013, the government launched the “Help-to-Buy” scheme to shake things up. And not before time.
Both mortgage schemes had/have distinct economic goals. In the 80s, Right to Buy was an initiative the government launched to fund the Falklands War effort.
Conservative stalwarts may claim otherwise, but either way, the electorate bought it:
- hundreds of thousands of council tenants bought their homes;
- the UK retained the Falklands;
- the pledged reinvestment into new housing from Right to Buy sales capital? Those funds weren’t there.
You be the judge.
Anyway, Right to Buy was successful, perhaps too successful. Ever since then, the UK has suffered a lack of affordable housing. One could thus surmise that this shortfall is, ergo, a problem of the Conservatives’ own making.
Now, thirty years on, we have another Conservative government. It is once again trying to make buying a home more accessible with this new scheme. Mayhap even atone under the long shadows of past sins.
This time, though, Help-to-Buy’s purpose is of a more domestic nature. The island the government is trying to save this time is the UK mainland. That said, it’s no less daring, no less unexpected nor any less out of character.
Help-to-Buy’s aim is to provide a much needed shot in the arm to:
- the housing market;
- the construction sector;
- and, by extension, the economy.
The scheme aims to tackle those problems with two complementary policies:
- Help-to-Buy Equity Loan;
- Help-to-Buy Mortgage Guarantee.
Fair reasoning, but how was Help-to-Buy so shocking?
Help-to-Buy mortgages marked the return to market of 5% deposit mortgages. Prior to economic collapse in 2008, 95% LTV mortgages had been one of the most common on the High Street.
But during the Credit Crunch, 5% deposit mortgages all but disappeared. Lending 95% of a home’s value didn’t meet revised FCA lending guidelines. And with the [then] regulator hot on responsible lending, banks didn’t dare err from the path.
Culling 95% LTV mortgages thus represented a seismic shift in the market. In the years prior, homebuyers could borrow 100% of a home’s value with relative ease.
At one point, house price rises were so acute, lenders lent more than a home’s market value. That meant mortgage borrowing > 100%.
Lenders’ justification for 105% and 110% mortgages? Come mortgage completion, the home would be worth more than it had gone to market for.
In many instances, the market brought their predictions to bear.
But those days are long gone. With so many harsh lessons learned, it’s unlikely they’ll ever return.
Back to reality: the two types of Help-to-Buy schemes
Both Help-to-Buy products allow homebuyers access the property ladder with 5% deposit. Yet the modus operandi of each target separate markets, thus have distinct differences.
First to launch was the Equity Loan scheme. The second, the Mortgage Guarantee scheme, followed not long after. Due to demand, the government even launched Mortgage Guarantee early. To say that the economy needed people to start buying homes again is like saying fish need water.
The government used Equity Loan as the medium for 95% LTV mortgages for new build properties. The secondary Mortgage Guarantee facilitated people buying 95% LTV existing homes.
As alluded, 5% wasn’t — and still isn’t — much to put down on a home from a lender’s perspective. It doesn’t provide the security that responsible lending guidelines deem ‘low risk’. This is especially true with first time buyers who may have little in the way of credit history.
So, what are the lending criteria for Help-to-Buy mortgages?
The scheme(s) are open to anyone who wants to buy either buy a new-build home or a new home up to £600,000. But there are some caveats.
Help-to-buy vetoes anyone trying to use it to buy a second home or a buy-to-let. Also, foreign buyers with zero credit history won’t be able to use the scheme.
As a starting point, both Equity Loan and Mortgage Guarantee work with:
- the homebuyer putting down 5% deposit;
- a secondary contribution from a third party of 20%;
- the mortgage lender issuing a mortgage of the 75% balance.
That’s the quick guide to Help to Buy; now, let’s get specific.
Help-to-Buy: Equity Loan
Homebuyers can use Equity Loan only to buy a new build home. They work thus, using an example of a home coming to market at £200,000.
First, you need to raise five percent of the cost of the new-build property yourself for a deposit.
Besides your 5% deposit, the government loans you a further 20% of the property’s cost. This will bolster your deposit to 25% in total, making you a more appealing prospect. You arrange this 20% of your mortgage through the New Build contractor.
Last up, you need to arrange a mortgage for the remaining 75% of the New Build property. This you have to do yourself. Not all mortgage lenders are participating in the scheme.
Update, November 2019:
The Help to Buy ISA closed to new accounts at midnight on 30 November 2019. If you have already opened a Help to Buy ISA (or did so before 30 November 2019), you will be able to continue saving into your account until November 2029.
/back to the example.
On a £200,000 house, the 5% deposit you’ll need to find is £10,000. You’d receive 25% of the £200,000 — £40,000 — from the government. The balance, 75%/£150,0000, you’d need to arrange with a participating mortgage provider.
Why does Equity Loan help you get a mortgage?
Advantages of the Equity Loan scheme for buyers are clear. The biggest shift is that, in a bank’s eyes, you have a much larger deposit. You have 5% of your own plus the 20% guaranteed by the government. That 25% deposit puts you in a much stronger position because you represent a lot less risk.
As such, mortgage lenders are far more likely to offer you a mortgage. Those mortgages could attract much more competitive interest rates, too.
That said, Help-to-Buy interest rates aren’t the most competitive to start with. If you can raise 10%, there are better ways to buy a home.
But when it comes to repaying Equity Loan, there is a bonus. For the first five years of Equity Loan, the outstanding government debt is interest free. That’s the 20% bit they contribute to your deposit.
During year six, you will have to pay an admin fee to pay on the 20%. The first year, you’ll pay interest at 1.75% of any residual balance of the loan. This will then increase year-on-year in line with the Retail Prices Index (inflation), plus 1%.
Going back to our £200,000 home, here’s what that could mean in figures.
Repaying the Equity Loan — crunching the numbers
Your total loan from the government to make up your deposit was £40,000. During the first five years of your mortgage, you’ve managed to pay back £500/month consistently. That means you’ve repaid £6,000 every year interest free, so £30,000 repaid in all.
That leaves you with a balance on the 20% government contribution of £10,000. It’s on this £10,000 that you’ll start to pay the initial 1.75% annual admin fee. This will be year six of your mortgage.
Should you continue repaying £500/month in year six, that £10,000 will become £4,000. But you then have to factor in the 1.75% interest you accrue over the year.
For the balance of £4,000 + 1.75% interest that you carry into year seven, the interest rate rises again. So, you’ll you’ll pay an interest rate in year seven of the initial 1.75% + [inflation + 1%].
So, let’s imagine that inflation is 2.5% during year seven. That means the interest rate on any government contribution balance is 1.75 + [2.5% + 0.025%] = 4.275%.
At this point, the Equity Loan could begin to become expensive. If you can pay off the full government contribution — the Equity Loan — in the first five years, do it. You will save £100s, if not thousands, in interest alone.
Regardless, you must repay the government’s equity loan in full after 25 years. Or when you sell your home, whichever comes first.
Now, here’s where the government has been a little cute. If you sell your home before you’ve repaid the Equity Loan, you don’t pay 20% on what you borrowed. You will pay back the market value of the home, not the initial mortgage loan.
So, imagine that the £200,000 home was worth £250,000 when you sold it. You’d repay 20% of the £250,000, or £50,0000, not 20% of your home’s cost price.
In contrast, if the property had decreased in value, you’d pay back less than the amount you borrowed. But that would be scant reward, as you’d realise less capital towards repaying the rest of your mortgage.
Can contractors qualify for Help-to-Buy?
The scheme is open to anyone, so it does encapsulate bespoke contractor mortgages. We have created a separate Q&A to answer the most common contractor-centric Help-to-Buy queries. That said, it’s worth touching on how this scheme applies to our niche here, too.
Having Help-to-Buy as a safety net can, in fact, help your mortgage broker secure finance for you. And this is important.
Not all mortgage lenders accept applications from limited company contractors. Or if they do, any forthcoming offer is derisory and based upon net pay and payslips.
Likewise, not all lenders have signed up for Help-to-Buy. But there is an overlap: contractor-friendly lenders who also offer Help-to-Buy mortgages.
Before you even begin to consider where to find this promised land, stop. A genuine contractor mortgage broker already knows who those lenders are.
They will only approach applicable mortgage lenders on your behalf. This saves you time. It also protects your credit history from overzealous searches by generic IFAs.
If it’s a new-build the contractor wants to buy, then Equity Loan covers the 20%. If it’s an existing property, the Mortgage Guarantee scheme shores up the application.
Don’t get bullied into signing up with an “approved” lender
There’s a major warning you must heed here. Don’t let new build contractors bully you into using their ‘approved’ mortgage lender. This has happened many times already.
Everyone should try avoid such strong arm tactics, but contractors even moreso. There are no rules that state buyers must use the construction company’s lenders.
Going down the generic route may see untrained lenders reject you application. That’s the case for any mortgage, not just Help-to-Buy.
Knowledge of the way contractors streamline their income is scant amongst unfamiliar IFAs. Going through a third party such as a site agent will only compound this ignorance.Double exposure of this nature will lead to contractor mortgage rejection. I can almost guarantee it.
Lenders will recount the tired cliché: contractors are less ‘reliable’ with unsteady income. The result: they’ll categorise contractors as ‘self-employed’.
Payslips and/or accounts won’t get a contractor a favourable Help to Buy mortgage
Once they’ve managed to pigeonhole you thus, that’s when your problems begin in earnest. They’ll next try to assess your affordability using your pay-slips or accounts.
Using accounts to work out a contractor’s affordability is old, tired and irrelevant. The calculation often misses/ignores large swathes of contract income. It doesn’t highlight true earnings values; it doesn’t pin down true net worth.
It instead glosses over them in its determination to find an absolute income figure. Their formulae may work for PAYE employees and genuine self employed people. But it is awful for determining how much a contractor can afford to borrow for a mortgage.
So you can say the same for Help-to-Buy for contractors as you can for any type of mortgage borrowing. Use a broker who understands:
- how contractors work and why they choose the lifestyle;
- how contractor accountants streamline income for tax efficiency;
- that a limited company is a payment structure, not just a statement of intent;
- which mortgage lender is best for each specific contractor and their unique circumstance.
You work hard and have chosen contracting to improve your lifestyle. Neither an ignorant advisor nor bullish agent should stand in the way of your progress.
You now owe it to yourself and your family to engage a contractor friendly mortgage broker. They’ll give you the best chance of securing a Help-to-Buy mortgage on your terms.
We’ve provided a quick FAQ for standard contractor-specific queries, below. This looks to answer the most common questions that contractors raise about Help-to-Buy.
If you’re confident you have the information you need, you can initiate the process now. Get in touch by phone, email or even request a call back at a time more suitable for you.
Guide: Help-to-Buy FAQ
The government’s Help-to-Buy programme has entered its next iteration. Tens of thousands of prospective UK homebuyers have used the scheme to date.
In many cases, the government initiative seems to have fulfilled its aim. It’s helped people get on the housing ladder who can afford mortgage payments but not a large deposit.
Help-to-Buy does have its critics. They claim that people are taking advantage of the scheme to get help buying £600,000 homes. Bankers and executives in the city are amongst those whom said critics accuse.
The problem? The upper-middle class demographic was not the scheme’s target market, per se. But Help-to-Buy is what it is and has upper thresholds in place for a reason. That some buyers use it up to its full potential is not a crime.
For the majority, Help-to-Buy has provided invaluable leverage and it will do for some time yet. Finding 5% deposit, especially if you’re already renting, is much easier than the 10%-15% minimums that came before.
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?
There are two separate schemes under the Help To Buy programme. The Equity Loan was the first and was what the government launched to entice people to buy New Build properties.
The second is for those who want to buy a home in a more traditional way. It’s called the Mortgage Guarantee and people can use it to buy existing homes.
On the surface, Mortgage Guarantee is the more conventional one of the two. From a buyer’s perspective, it’s similar to the established capital and interest mortgage.
Both schemes have the same underpinning theory: helping people buy a home with 5% deposit. But there are critical differences in how they operate. To clear up any confusion, here’s our Help-to-Buy FAQ.
Help To Buy isn’t new, is it?
Help-to-Buy has been running for some time, now. The government launched part one – Equity Loan, for new build homes – in April 2013.
The second part was Mortgage Guarantee. Designed to help buyers buy existing housing, its planned launch date was January 2014. Forces conspired and the Mortgage Guarantee launched early in November 2013.
How does Part One of the Help-to-Buy (Equity Loan) work?
Equity Loan is for homebuyers who want to invest in a new build property. You will need 5% deposit of your own. The “Equity Loan” takes the form of an extra 20% (of the home’s cost) from the government.
The balance of 75% you will arrange with your mortgage lender/broker in the usual way.
The highest value home you can buy under Help-to-Buy is £600,000. So, let’s look at an example using that top limit.
First, you’ll need to find 5% deposit. In this example, that’s £30,000.
Next, you’ll speak to the construction company building that home or their agent. It’s they who’ll arrange the 20% “Equity Loan”, in this case £120,000.
You’ll find that agent, more often than not, in the new project’s show home or their dedicated on site office.
The final piece to the jigsaw is the actual mortgage. Despite what the on-site agent tries to tell you, you can arrange the mortgage yourself. Specifically for contractors, Halifax have some great Help-to-Buy rates.
Agreed, not all mortgage providers have chosen to offer Help-to-Buy. But there are more lenders offering H2B mortgages than the on-site agent may imply.
For buyers, this is a massive boost, allowing people quicker access to a wider range of properties.
The repayment terms are also favourable. The first five years of the equity loan are interest-free.
If you don’t repay the loan in that five years, you incur an admin fee of 1.75%. That rate will increase every year at the rate of one percent above the Retail Prices Index. In any event, you must repay the Equity Loan within 25 years or when you sell the house.
It makes sense to clear the loan before you sell your home. If you leave repaying the loan until you sell, you might get an unpleasant surprise.
You won’t repay an amount commensurate to the amount you borrowed. You’ll pay a value that’s linked to the sale price.
This is great if the value of your home’s decreased. But if it’s increased, the amount you repay could be a great deal more than you borrowed pro rata.
How does Part Two of the Scheme (Mortgage Guarantee) work?
Part 2 of Help-to-Buy is for people who want to buy a home with 5% deposit, but not a new build.
Many elements are the same as Part 1, including the minimum deposit and borrowing ceiling. But it’s how the government reduces the risk of the transaction that’s different.
The government guarantees to cover an extra 15% over and above the borrower’s 5% deposit. In effect, the government is insuring the lender against:
- default payments;
- negative equity;
- stepping outside FCA Responsible Lending guidelines.
This makes the lender more confident in approving the Help-to-Buy mortgage. They needed this leg up after years of strict adherence to post – Mortgage Market Review recommendations.
The mortgage guarantee also gives buyers with 5% deposit access to a broader selection of mortgages. With an effectual 20% deposit, buyers can secure much more competitive interest rates.
Who is eligible for the two schemes?
Anyone UK resident who doesn’t already own a home can access Help-to-Buy. The scheme’s policy excludes foreign buyers with no credit history. As well as existing homeowners, investors looking for a buy-to-let property also cannot use Help-to-Buy.
Can everyone borrow the full amount?
Of those eligible for Help-to-Buy, most can borrow up to the full amount. But the onus is still on lenders to abide by responsible lending guidelines.
In all likelihood, lenders will limit mortgage loans of this type to five times their earnings. That’s regardless of any limit set out in the policy.
Sole earnings or joint earnings of the buyer and their partner will contribute to that limit. Disposable income will play a factor, too. In effect, borrowers still need to ensure that proposed mortgage payments don’t exceed 55% of their income (after tax).
What interest rates do borrowers incur?
How much interest borrowers will incur on their Help-to-Buy mortgage will vary. At the time of writing there are several fixed rate mortgages set at 4.99% (for two years). Some come in a little higher at 5.19%.
That said, those are the rates for 95% loans. People who can raise larger deposits can access much better deals. But if you can raise =>10%, it maybe worth looking at other mortgage products.
What happens if I cannot pay?
Defaulting on a Help-to-Buy mortgage has the same consequences as on any other mortgage loan. The lender can force you to sell the property. Once sold, you must be able to pay of the mortgage in full. If you’ve borrowed through the Equity Loan scheme, you’ll need to repay that, too.
The lender can also instigate repossession proceedings. They’ll then sell it on your behalf to recoup what you owe, which may mean selling it at less than it’s worth. Even then, you’ll need to repay any Equity Loan, commensurate to the sale price.
Is the Help-to-Buy Scheme indefinite?
The government has set aside a total fund of £130 billion. £12 billion of that is for loan guarantees.
The hope is that the fund will encourage the sale of 75,000 homes. That’s over the three years that the scheme is foreseen lasting. The government has reserved the right to extend Help-to-Buy after the initial three year scheme.
Is the Scheme operating all across the UK?
The guide outlined here applies to English Help-to-Buy. The Scottish government began a similar scheme in September 2013. There, you can only buy a property up to the value of £400,000.
The Welsh parliament will soon announce its own version of Help-to-Buy, too.
Are all parties in favour of Help-to-Buy?
Not everyone is giving Help-to-Buy their full support. The government’s Business Secretary, Vince Cable has expressed doubts. He believes the scheme may set off another unsustainable house price merry go round. His fears are that Help-to-Buy may result in another dangerous housing bubble.
Could Help-to-Buy cause another boom and bust cycle?
The government has done its homework. It claims to have embedded measures that ensure longevity for homebuyers who use Help-to-Buy.
Excluding offset- and interest-only mortgages and refusing buy to let investors are amongst those safeguards. Rigorousness eligibility checks should also deter reckless spending or lending.
Those goals are realistic, providing all parties play their part. Help-to-Buy could prove the shot in the arm that the housing and construction industries need.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.