19-11-2013

Second phase of Help to Buy scheme now launched

Phase 1 of the Help to Buy Scheme aimed to help first-time buyers who could raise a 5 per cent cash deposit for the purchase of a new-build property worth up to £600,000. It allowed them to borrow a further 20 per cent of the purchase price from the Government to put toward the purchase, so they only needed to apply for a 75 per cent mortgage for the rest.

The government loan was interest free for five years, but annual fees were then payable at 1.75 per cent of the loan. On sale, the Government recovered 20 per cent of the sale price – which could be more than the original loan if the value of the property had gone up.

 Phase 2 has now been launched and is available to existing home-owners looking to move to any type of property, not just first-time buyers. The buyer must still put up at least a 5 per cent cash deposit, but the Government no longer lends actual cash to the buyer. Instead, it guarantees up to 15 per cent of the mortgage granted so that, if the borrower defaults and the property is repossessed and sold for less than the balance of the mortgage, the lender can apply direct to the Government for repayment under the guarantee.

The buyer therefore only needs to contribute a cash deposit of 5 per cent of the purchase price, and satisfy the lender's usual checks. The aim is to reduce the risk to lenders so that they can offer cheaper interest rates to buyers. The lender pays the Government a fee for its guarantee.

 

The property must be worth less than £600,000, and borrowers must not own any buy-to-let properties or intend to keep the home they currently live in after the purchase. However, the competitive rates hoped for by the Government seem not to be materialising.

 

Recommendation

Homebuyers should consider whether to take advantage of the second phase of the government's Help to Buy scheme;

Developers involved in new build developments should consider the potential impact of Phase 2 on planned sales of new build under Phase 1, which may be affected by the early extension of the scheme to properties other than new builds.