Help To Buy Scheme

During the UK Budget speech on Wednesday, George Osborne launched the Help to Buy scheme. With £130bn of mortgage lending at the core of the initiative, the chancellor hopes "to support a new generation in realising the dream of home ownership." This article exposes how the scheme works and what it entails.

What is the Help to Buy scheme?
There are essentially two parts to the new Help to Buy initiative. The first is an interest-free loan from the government to help buyers purchase a newly constructed property. The second is a guarantee from the government to support a borrower’s mortgage. Both have zero restrictions on how much applicants need to be earning to qualify and are available for homes up to the value of £600,000.

How does the loan scheme work?
The loan scheme helps you purchase a new-build property and is available from 1^st April 2013. It expands the existing First Buy scheme but is now available to everyone as opposed to just first-time buyers and will run for three years. The buyer needs to raise a minimum deposit of 5% and the government will lend you up to 20% of the value of the property interest-free. The loan must then be repaid when the owner decides to sell the property. It’s believed that the £3.5bn scheme will help up to 70,000 buyers.

How does the guarantee scheme work?
The guarantee scheme helps you purchase a new or currently existing property and is available from January 2014. The scheme is available to first-time buyers as well as existing homeowners and will run for three years. Once again, the buyer needs to raise a minimum deposit of 5%. The government will then provide the lender with a guarantee for up to 15% of the loan; essentially allowing the lender to offer a mortgage even to buyers with a small deposit.

If you fall behind on your payments you could still lose your property, as the Help to Buy scheme isn’t designed to help you with your payments. The government guarantee is a safety net for the lender. The government will step in and take some of the damage if you end up defaulting on your payments and the lender can’t reclaim the costs via repossession and the sale of your assets.

The mortgage guarantee scheme is likely to help sellers, as it will provide support to buyers looking to purchase existing homes. Sellers may also end up benefiting as many speculate that the scheme will boost prices in the housing market and may even contribute to another housing bubble. With fears that demand will dramatically surpass supply, many will be queuing up to take advantage of the scheme upon its arrival, as those who are late to the table may end up missing the boat.

Author : Nick Marr

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