Help to Buy is designed to make 95% mortgages available for aspiring homebuyers who can afford a mortgage but have been unable to raise a deposit because of high rental costs and stagnant wages.
How Does It Work?
The Government guarantees up to 15% of the value of a property worth up to £600,000, encouraging lenders to make larger loan-to-value mortgages available. This guarantee is made to the lender rather than the buyer, and it reduces the loss that a lender would make if a buyer defaulted on their mortgage payments.
Homebuyers will still apply to a participating bank or building society as normal and applicants will still be subject to a lender’s standard affordability checks. It is estimated that the average deposit required for a property could fall by as much as three quarters as a result of the extension (read more).
The Second Phase: The Mechanics
The first phase of the scheme was launched in April, and was aimed at buyers of new homes worth up to £600,000. In the second phase, the guarantee applies to existing homes as well as new homes, and to home movers as well as first-time buyers.
The second phase of the scheme was brought forward by three months to October 2013, to allow aspiring homebuyers to get onto the housing ladder more quickly.
The Government has allocated £12 billion over three years to guarantee homes worth £130 billion. At average prices of around £220,000, the 15% guarantee would support around 363,500 home purchases - and this is not accounting for house price inflation, which is likely to remain strong in the near future.
- Maximum property value will be £600,000 (max. guarantee of £90,000).
- Available to new buyers or existing homeowners.
- Not available for second homes or buy-to-let properties.
Which Banks Are Involved?
At the time the extension became active, the Royal Bank of Scotland, NatWest, Halifax, HSBC, Virgin Money and Aldermore Bank were all committed to participating in the scheme. Santander has also since signed up to the scheme.
Of these, RBS, NatWest and Halifax will take enquiries for the opening weeks of the scheme. HSBC subscribed to the new scheme in October and will join later in 2013.
How Much Will it Cost?
The Government will charge the lender a fee of 0.9% on each guarantee to insure the loans for seven years. This is likely to be passed straight onto the borrower.
For this reason, the cost of the mortgage is unlikely to fall below 5%. Around 5% or slightly above would be competitive against the standard 95% LTV mortgages offered by major banks.
But it would not compete with the standard 80% LTV loans available to those who have compiled a 20% deposit without state support.
Nevertheless, it is hoped that the greater availability of high loan-to-value loans will assist thousands of homeowners who are currently locked out of the market by their inability to build this kind of deposit without additional help.
Are There Any Alternatives?
It is highly possible that smaller lenders - local mutual societies - will continue to offer better deals without the aid of the Help to Buy scheme.
Societies such as Furness (North West), Hanley Economic (Staffordshire), Monmouthshire (Wales / South West), West Bromwich, and Tipton & Coseley (both Midlands) have all offered excellent deals since the Funding for Lending Scheme began.
The downside to mutuals is that eligibility is often restricted to the surrounding counties. But this still covers a fair amount of territory and is worth investigating if you are an aspiring homeowner in one of these regions.
There are also innovative mortgage deals available for first-time buyers, such as Barclays' Springboard Mortgage, which allows parents/grandparents to provide 10% in equity towards a home for their offspring in the form of a savings bond.
Help to Buy may not be the only solution for homebuyers, and perhaps not always the best solution in every case, but it will add further adrenalin into the mortgage market, which should (from a demand side, at least) improve conditions for buyers.