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Now you can buy a home
with just a 5% deposit.
Now you can buy a home with just a 5% deposit – thanks
to two government schemes – both called Help to Buy.
Here’s how they work and what your next step should be
if you want to take advantage of either of them.
g s p c .c o.u k
New Homes
20% Government Deposit
This version of Help to Buy is available exclusively for new build homes.
If you want to buy a new build home in Scotland from a participating builder up to a
value of £400,000, the Scottish Government will provide up to 20% of the purchase
price (and take an equivalent equity stake in the property) as long as you have a 5%
deposit.
Provided you meet the relevant affordability criteria, that should allow you to obtain a
mortgage from participating lenders with just a 5% deposit. The mortgage must be a
repayment mortgage, not interest only.
The government’s 20% stake is interest free and you can pay it off at any time, in part
or in whole, but you must pay it off if you sell your home. If the value of your home has risen by the time you sell it, the amount you
repay the government will be a share of the sale price that reflects
their equity stake. For example, if the government originally
contributed 20% of the purchase price, but you had paid
back half of that by the time you came to sell, you
would repay the government 10% of the sale price.
You don’t have to be a first time buyer, but the
property does have to be your main home
– you can’t buy a second or buy to let
property with this scheme. If you already
own a home, you must sell it before
you can complete the purchase of
your new home. You cannot use a
part exchange scheme if you want
a mortgage under the Help to Buy
scheme.
The next step:
If you want to take advantage
of this version of Help to Buy,
you should look for new build
properties that are available
under the scheme and talk to the
builder. Most builders are offering
properties under the scheme and
they will be able to help you to start
the application process.
All properties
15% Government Guarantee
Another version of Help to Buy applies
to all properties, established as well as
new build homes, up to £600,000.
Under this scheme, the UK
government provides a guarantee
to the lender for 15% of the loan
value, provided you have a
5% deposit. The government
guarantee – which lasts for
seven years – provides the
security the lender needs to
offer a 95% mortgage. Again,
the loan must be a repayment
mortgage, not interest only.
The lender will have to pay the
government for this guarantee, so
interest rates on these mortgages
are going to be higher than they
would be if you had a bigger deposit. Bank of Scotland, Barclays, HSBC,
Royal Bank of Scotland, Santander,
Virgin Money and Aldermore Bank are
all expected to offer mortgages under this
scheme.
Unlike the new build option, the government does not
take an equity stake in your home and you don’t have
to pay the government anything if and when you sell. Once
again, you cannot use the scheme to buy a second home or a buyto-let property.
It is important to note that, while you can apply for a mortgage under the scheme now,
the money won’t actually be available until January 2014. In other words, you can go
ahead with a purchase, but your entry date will have to be from January 2014 onwards.
The next step: If you want to take advantage of this version of Help to Buy, your next
best step is to find a lender taking part in the scheme.
Is it right for you?
If you already have a 15% – 20% deposit, it is almost certainly cheaper and easier to
apply for a mortgage in the normal way.
If not, Help to Buy could be the solution you need to buy your first home or to move up
the property ladder.
For first time buyers
Both schemes could help you to buy your first home without taking years to build up
the deposit you need. They could be particularly valuable to anyone without family
financial support.
For many tenants, this could offer a realistic opportunity to move out of rented
accommodation for the first time. Which scheme you prefer depends on whether you want a new build home or not. Bear in mind that the 20% contribution by the Scottish Government under Help to Buy
for new homes does not attract interest, so your total mortgage payments will be lower. But the government will own a share of your home until you repay their equity stake.
Second steppers
Arguably, these schemes are as important for anyone aspiring to move up the property
ladder as they are for first time buyers. They could be the solution for homeowners
with some equity in their existing homes, but not enough for a 15% – 20% deposit on a
larger home. Say, for example, you currently have £15,000 equity in your home and you want to buy
a property worth £200,000. Mortgage lenders today would expect you to provide a
15% - 20% deposit (i.e.£30-40,000) which puts that property out of reach.
But with Help to Buy and a 95% mortgage, you would only need a £10,000 deposit,
giving you enough equity to move in to a larger home..
Lending criteria
Both the UK and the Scottish governments have been at pains to emphasise that
normal affordability criteria will apply. In other words, you have to be able to show that
you can afford the mortgage repayments in order to qualify. You will not automatically
obtain a 95% mortgage just because you have a 5% deposit.
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