How does the government’s Help to Buy mortgage guarantee scheme work?

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If you want to buy a property but don’t only have a 5% deposit, you may be able to get help from the government’s Help to Buy mortgage guarantee scheme, which runs until December 31st 2016. How does it work?

Mortgage guarantee scheme – the basics

With the Help to Buy mortgage guarantee scheme, you must:

1. Buy a house or flat costing no more than £600,000.

2. Buy a house or flat that you will live in and not rent out.

3. Buy a house or flat that’s the only property you own.

4. Buy the property outright rather than through a shared ownership scheme.

5. Buy the property with a repayment (capital and interest) mortgage. You can’t buy it with an interest-only mortgage.

SAVVY TIP: You don’t have to be a first time buyer to use the Help to Buy mortgage guarantee scheme, and you don’t have to buy a new property.

6. You will have to apply for your Help to Buy mortgage (for a specific property, not for a mortgage approval in principle) by December 31st in order to get it. You don’t have to have exchanged contracts or completed.

Who’s offering Help to Buy mortgages?
A number of mortgage lenders are offering Help to Buy mortgages. The government announced that the scheme will close on December 31st 2016. As I write this in July 2016, here’s the complete list:

Al Rayan Bank Home Purchase Plan: This is a Shariah compliant alternative to a conventional mortgage. You can use it to buy a property costing up to £600,000 with a maximum loan-to-value limit of 90%.

Aldermore Bank Help to Buy mortgage: You can use this to buy a property costing up to £400,000 with a mortgage of between 80% and 95% of its value.

Bank of Ireland Help to Buy mortgage: This mortgage is only available for customers in Northern Ireland.

Halifax: There’s not much information about Halifax’s Help to Buy mortgage on its website.

HSBC Help to Buy mortgage: You can use this for a mortgage of between 80% and 95% of the property’s value, up to a limit of £400,000. You can’t use it to buy a new build property if you only have a 5% deposit and the maximum mortgage term is 25 years.

Lloyds Help to Buy mortgage:  In England and Wales the Government lends up to 40% of the value of the property in Greater London, or up to 20% of the value of the property outside of Greater London. In Scotland the Government lends up to 15% of the value of the property.

NatWest Help to Buy mortgage: You can use this mortgage for a property where you have a deposit of between 5% and 10%.

Post Office Help to Buy mortgage (provided by Bank of Ireland):

RBS Help to Buy mortgage:

Ulster Bank Help to Buy mortgage:

Virgin Money Help to Buy mortgage:

How does it work?
The Help to Buy mortgage guarantee scheme means that:

  • First time buyers as well as those ‘trading up’ will be able to take advantage of help to buy. You can also take advantage of it if you are remortgaging to a different lender, but not if you are simply switching from one mortgage deal to another with the same lender.

SAVVY TIP: You will not be able to use help to buy if you are buying a property through a company.

  • The government will underwrite 15% of the mortgage. The mortgage lender will pay the government a fee in exchange for the government underwriting part of the mortgage.

SAVVY TIP: The guarantees will last for seven years from when you take out the mortgage. The idea is that after seven years your property should have risen in value, or you will have reduced the level of the mortgage through repayments, so that you don’t need the help to buy guarantee.

  • The buyer will have to come up with a deposit of at least 5%. This means they would be able to get a mortgage of up to 95% of the property’s value, although some Help to Buy mortgages may be limited to 80% of the property’s value.

SAVVY TIP: One of the reasons why mortgage lenders are reluctant to lend to people with small deposits (who want to borrow 90 — 95% of the property’s value) is that they have to have a lot more ‘capital’ behind them if they lend out a 95% loan to value mortgage compared to lending out a 60% loan-to-value (LTV) mortgage. In fact they need six to eight times as much capital (basically, assets they own) to back a 95% LTV mortgage compared to a 60% LTV mortgage. Mortgage lenders lending through help to buy shouldn’t need to keep so many assets in reserve.

Related articles:

How easy is to get a mortgage if you’re self employed?

Shared mortgage with parents and family guarantee mortgages explained

Understanding the different types of mortgage

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