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Help to Buy

A lot has been said in the press about the Government's Help to Buy scheme, but what does it mean in practical terms? We look at the issue.

In recent years we have seen successive governments promoting the extension of home ownership through a variety of different equity loan and guarantee schemes.

The latest to be announced is the second phase of the Help to Buy scheme.

Phase 1 of the Help to Buy scheme was introduced on 1st April 2013 and under the first phase the Government provides an equity loan worth up to 20% of the value of a newly built home.

A purchaser can buy a newly built home under the scheme from a house builder by paying a deposit of only 5% of the purchase price and by borrowing a further 75% of the cost through a mortgage.

The loan is interest-free for the first five years but from the sixth year onwards an administration fee will be payable of 1.75% of the loan’s value, which will increase every year in line with the Retail Price Index.

The equity loan is repayable when the mortgage term finishes or when the property is sold, whichever happens first, and the market value of the loan will be repayable rather than a fixed cash amount.

The Government originally set aside £3.5 billion to fund phase 1 of the scheme and it is expected to run until 31st March 2016 (or earlier if all of the funding is used before that date).

Phase 2 of the Help to Buy scheme was due to be released in January 2014, however it has been released three months ahead of schedule, although no completions will take place under the scheme until January.

The second phase is a new mortgage guarantee scheme, which is available to assist with the purchase of newly built or existing homes.

Again a purchaser is required to pay a 5% deposit but can then borrow up to 95% of the purchase price of the property from a mortgage lender.

Under the scheme, the Government guarantees any mortgage borrowing above 80% of the property’s value.

Most of the UK’s biggest mortgage lenders have signed up to offer Help to Buy mortgages and the obvious advantage to them is that lending to purchasers with small deposits under the scheme will carry much less risk.

This is turn should mean that mortgage lenders will have more mortgage products available for purchasers with a smaller deposit.

However, lenders have the freedom to set their own interest rates as part of the scheme, so the rates being offered may be relatively high.

The Government has set aside £12 billion of guarantees for up to £130 billion of high loan to value mortgages and phase 2 is expected to remain open for three years to January 2017.

The eligibility criterion is wider under the Help to Buy scheme than we have seen with previous schemes.  The maximum home value that can be bought under the scheme is £600,000 and there is no income cap constraint.

It is open not only to first time buyers but also those looking to move up the housing ladder, thereby recognising that problems in obtaining mortgage finance are not exclusive to first time buyers.

However, critics of the scheme say that, as more people have access to mortgages, house prices will rise and this could in turn create a housing bubble.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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