Finding a deposit for a new home can prove extremely difficult for any first-time buyer, especially those on lower incomes. It is often too high, even if you have help with a short term loan.
The Help to Buy scheme was created by the government to help people who fall into this bracket, although there is some confusion as to how it works and whether or not applications are better off for using the scheme. Cash Lady tells you everything you need to know.
What is Help to Buy?
In April 2013, the Help to Buy scheme was created by the then coalition government. The aim of the scheme helps buyers get onto the property ladder by reducing the often prohibitive deposit down to 5%.
There are two phases involved, the first providing government-funded loans to buyers of new build properties worth no more than £600,000.
The second phase is related to new and second-hand homes. This also reduces the required deposit down to 5% and includes a government guarantee as part of the mortgage, which ensures a portion of any losses are covered should it proceed to foreclosure in the future.
Why was Help to Buy created?
The combination of the 2008 financial crash and a thriving housing market has led to a huge gap between wage income and property prices – especially for first-time buyers. The purpose of the Help to Buy scheme was to help people on lower incomes afford to buy a property.
According to land registry data, the average price of a property in the UK as of March 2019 is £226,798. Anyone applying for a mortgage through the Help to Buy scheme would, therefore, require a 5% deposit of £11,340.
How does Help to buy work?
The scheme has been designed to help first time buyers, enabling them to borrow as much as 20% of the value of a government new build home. This includes a minimum of a 5% deposit along with securing a mortgage that will provide cover for the remaining 75% of the property’s value.
For the first five years, the loan will remain interest-free. After this period borrowers are then charged 1.75% of the loan’s value. Each year the fee increases at 1% above inflation. When the property is sold, or at the end of the mortgage period, the loan must have been repaid in full.
What is the most you can borrow?
The upper limit can extend up to £570,000, although this will depend on the amount of income you have available, which will likely limit how much you can loan. In most cases, this will mean no more than five times of your earnings, whether single or joint, can be borrowed. There are also strict limits related to the amount of spare income available after bills have been paid.
However, research conducted about the salary needed to qualify for a Help to Buy loan has discovered the average wage to be over £40,000 – which is some way above the national average of £29,588. This can mean that the mortgage being offered through the scheme is below expectations and requirements.