Government backed first time home buyer mortgages scheme

Government backed first time home buyer mortgages scheme

Help to Buy, the scheme established by the British Government to support first time buyers, provides financial assistance in one of two ways: by offering an equity loan worth up to 20 per cent of a property or by encouraging lenders to make mortgages available for people who can only afford to pay a small deposit. What are the pros and cons of the Help to Buy scheme?

Pros

Buying a new home can be expensive and in recent years the situation has become more difficult for thousands of first time buyers. The problem is that the downturn hit the housing industry hard, prompting lenders to offer fewer mortgages to sub-prime borrowers (i.e., those whose financial circumstances were not ideal). Interest rates (set by the Bank of England) have been kept low for several years, so lenders sought to control the market by increasing deposits. Now lenders expect mortgage applicants to pay deposits of between 15 and 25 per cent, which most people simply cannot afford.

Help to Buy aims to address this limitation in the market by supplying up to 20 per cent of the required deposit. Under the equity loan scheme, buyers are required to pay a minimum deposit of 5 per cent. Payment of the remaining 20 per cent (assuming the mortgage lender requires a 25 per cent deposit) will be divided equally between the government (10 per cent) and property developer (10 per cent).

The assistance provided by Help to Buy, which is supported by a £5.4 billion finance package, will ensure that many more people in the UK are able to climb onto the property ladder.

Cons

The mortgage guarantee aspect of Help to Buy is not available until January 2014. House prices are beginning to increase after suffering a slump between 2007 and 2012, so when the mortgage guarantee scheme does go live, many first time buyers could find themselves in just as bad a position as they are in at the moment.

The equity loan aspect of Help to Buy launched on the 1st April 2013, but prospective buyers are limited to new-build properties. The mortgage guarantee scheme is available for people who want to buy any kind of property, but as noted above, the scheme does not commence until early next year. That the equity loan scheme is restricted to new-build properties will undoubtedly disadvantage many prospective buyers, especially as new-build properties are not available in all areas.

Despite its name, the mortgage guarantee scheme merely encourages lenders to supply mortgages to people who cannot afford to pay large deposits (e.g., 25 per cent). That means a lender might consider providing a mortgage if the buyer can provide, say, a 10 or 15 per cent deposit, but it does not mean that people are guaranteed a mortgage. The usual lending criteria apply to all mortgage applicants, regardless of government support.

Help to Buy is limited in several other ways. The scheme is only available on properties valued at £600,000 or less and is not available in all parts of the UK. If the buyer sells their home after five years, they must contribute to or pay off the deposits paid by the government and developer from the sale price.

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