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Help to Buy – What is it?

We take a look at the new Help to Buy scheme, proposed by the Chancellor in the recent Budget. The scheme is aimed at boosting the housing market, by allowing people to get onto, or move up the housing ladder. But how is this achieved?

There are two different parts to the Help to Buy scheme. These are the ‘equity loan’ scheme and the ‘mortgage guarantee’ scheme.

Help to Buy: Equity Loan Scheme

The qualifying factors for the equity loan scheme are as follows:

- You need to have a deposit of minimum 5pc of the value of the house
- The house can be worth no more than £600,000
- The house must be a new build
- You must pass normal credit and affordability tests

Once you have passed all of the qualifying criteria, you are able to gain access to a loan that is worth up to 20pc of the asking price of the house. If you couple this with your 5pc deposit, you then only have to get a 75pc mortgage. This is detailed below:

1. House price: £400,000
2. Your deposit: £20,000 (5%)
3. Help to Buy loan: £80,000 (20%)
4. Your deposit plus Help to Buy loan: £100,000 (25%)

Required mortgage: 1 minus 4 = £300,000 (75%)

The equity loan scheme will come into effect in from 1 April 2013. After the initial five year interest-free period, there will be interest charged on the remaining balance. From year six this will be 1.75pc, and this will rise each year at the same rate as inflation, plus 1pc.

Help to Buy: Mortgage Guarantee Scheme

The other available option is the mortgage guarantee scheme. Again there is qualifying criteria you must meet to be eligible for the scheme.

- You need to have a deposit between 5 and 20pc of the value of the house
- The house can be worth no more than £600,000
- You must pass normal credit and affordability tests

This scheme works differently to the equity loan scheme, as the government is incentivising lenders to make mortgages more readily available. The government will provide lenders with the option of a guarantee on the high loan-to-value portion of the mortgage. This basically takes a lot of risk out of the deal for the lender. However this scheme will not be available until January 2014, so there is a longer wait.

Help to Buy key points:

- You must have a deposit of at least 5pc to qualify

- For both schemes borrowers will have to complete appropriate tests to make sure they are able to pay back the mortgage

- Help to Buy is only available on capital repayment mortgages

- You cannot use the Help to Buy scheme on a buy-to-rent basis

- The equity loan scheme can be accessed through housebuilders and HomeBuy agents

- The government will release more details regarding the mortgage guarantee scheme later this year

For more information on this scheme, and how you can make the most of it, please contact one of our advisors who will be happy to give you all the information you need.

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