The property market is one busy merry-go-round at the moment. There has been a marked increase in activity and a rise in property prices generally over the last 12 months, largely thanks to first time buyers coming into the market. Reports show that some sectors are still suffering the effects of the recession whilst the property market shows a different picture. This new boom can in part be attributed to the Government with the desire to help those who previously were unable to step onto the property ladder via the Help To Buy initiative.
What is Help to Buy?
‘Help to Buy’ is 2 phase initiative designed by the Government to assist first time buyers. Introduced earlier this year by the Government it is hoped the this will enable individuals to obtain financial help in purchasing their home if they reside in England and are unable to finance the purchase themselves.
Up until recently, the Help to Buy (officially known as New Buy) ownership scheme only applied to those who were (a) purchasing a new-build property for up to £600,000; and (b) first time buyers.
However, the Government has expanded the scope of Help to Buy so that anyone looking to purchase a residential property to live in worth up to £600,000.00, regardless of whether it is new build or not, may do so through Help to Buy. More on the extension of the scheme later, but for now.....
How does Help to Buy work?
The Help to Buy equity loans are available to anyone looking to buy and live in a new-build home worth up to £600,000. Eligible candidates for Help to Buy will need to be in a position to finance at least 5% of the purchase price of the property. The Government will then provide a loan of up to 20% of the price whilst the remaining balance (usually 75%) of the purchase price will be financed through a mortgage.
The Help to Buy loan is interest free for the first 5 years, and thereafter a fee of 1.75% of the value of the Help to Buy loan will kick in. The fee payable will increase every year by the change in the retail prices index plus 1 per cent. Any fee paid in this duration will not count towards paying back the equity. You must repay the full 20% of the Help to Buy loan on the same day your mortgage comes to an end or when you sell your property (whichever arises first) but there is no time constraint in which you must sell your property under the Help to Buy scheme. You can make early repayments of the loan of a minimum of 10% of the market value as long as over 10% of the purchase price is financed by way of the Help to Buy loan. Although you are committed to repaying the percentage contribution you receive at market value when you come to sell, even if the value of your property falls below the price paid when you purchased it, you will not be required to make up for any shortfall in the equity.
Help to Buy – mortgage guarantees
The Help to Buy scheme will now be extended to a second phase to include any property up to the value of £600,000.00. This second phase will offer guarantees to the value of £12 billion to back mortgages for buyers seeking to purchase with a 5% deposit. This extension is intended to act as a catalyst to kick start the property market and indeed the British economy at large.
However, critics of Help to Buy say that phase 2 has the potential to be incendiary.
Experts have already predicted an increase in property prices over the next five years, and this has cast doubt on how effective the Help to Buy extension will actually be. If house prices are set to continue rising, early homebuyers can ride on the wave of increasing equity to work their way up the property ladder in any event, with or without Help to Buy. The risk is the creation of another housing bubble of home buyers subsidised by the tax payer, which risks pushing prices up, making housing even more unaffordable for the very people Help to Buy was originally designed to help. If prospective home owners take advantage of Help to Buy without being constrained to new build properties, it augurs a fall in demand for new build properties as potential owners capitalise on the extended scheme.
With up to 75% of the purchase price financed by way of a mortgage, some lenders are sceptical about the commercial reality of Help to Buy as it will preclude them from increasing interest rates on lending as Help to Buy borrowers will already be over-stretched by their very nature. There are also concerns over demand for housing out-stripping adequate supply. Others believe that while the extension of the Help to Buy scheme will encourage banks to lend again, it will lead to a sharp increase in interest rates. These concerns make this Government initiative seem short-sighted.
However, that hasn’t dampened spirits; those who do not meet mainstream banks’ lending criteria are now queuing up for Help to Buy.
Help to Buy is certainly exciting for those looking to make that all important first step. If you are looking to purchase a property to live in up to the value of £600,000 as a first time buyer or home mover and have at least 5% of the purchase price to use as your deposit, then take a look at Help to Buy to see if it could work for you. Call the Saracens property team to find out how we can get you into your new home within weeks.
For more information about Help to Buy, visit Rightmove's Help to Buy page.