Different types of Help to Buy mortgages

Often referred to as ‘Help to Buy 1’, Ian Wilson, head of Halifax Intermediaries, says one of the positives of this arm of the scheme is that it is open to both first-time buyers and home movers in England for properties worth up to £600,000. It is, though, limited to new-build homes.

This English original was controversially extended in March of this year, taking its planned end date from December 2016 to 2020, adding £6bn to the originally planned £3.5bn cost.

A similar scheme was later announced in Scotland in September 2013 for properties worth up to £400,000, running for three years to 2016. All funds for the 2014/2015 financial year were allocated as of July; a further £100m is available for purchases concluded in the year after April 2015.

A Welsh version was rolled out for homes worth up to £300,000 in January 2014. It is also planned to run until March 2016.

To purchase through any variant of the equity loan scheme you will need to contribute at least 5 per cent of the property price as a deposit. The government will give you a loan for up to 20 per cent of the price, meaning the buyer will need a mortgage of up to 75 per cent to cover the rest.

Mr Wilson says: “You should be mindful that for properties purchased through the equity loan scheme the loan must be paid back after 25 years or when you sell your home - whichever is earliest.

How much you pay back will depend on the market value at that time. You can pay back part or your entire loan at any time, subject to a minimum percentage of 10 per cent of the market value, Mr Wilson adds.

While a buyer will not be charged loan fees for the first five years, in England and Wales in the sixth year they will be charged a fee of 1.75 per cent of the loan’s value, increasing every year by the Retail Price Index plus 1 per cent.

In Scotland, no interest is charged on the loan.

Brian Murphy, head of lending at Derby-based Mortgage Advice Bureau, says the downside with Help to Buy 1 is the shared equity requires the borrower to give up a share of any appreciation in the increase in the value of their property either when it is sold, or if and when they exit the shared equity element of the mortgage.

Second phase

The second arm of Help to Buy, the mortgage guarantee scheme often referred to as Help to Buy 2, was introduced last October and is the more contentious part of Help to Buy, says Richard Sexton, director of e.surv.

Mr Sexton says it is contentious, because it encourages banks to offer more high loan-to-value home loans. It is available across the UK on all properties up to the value of £600,000, not just new builds.

Taxpayer cash is used to underwrite close to 15 per cent of the value of a mortgage in the event that losses are incurred, when a lender offers a loan to buyers with deposits of just 5 per cent. Thus if a property’s value falls by more than 5 per cent, banks will be protected.

Participating lenders in the scheme are:

• Aldermore Bank

• Bank of Ireland (Northern Ireland only)

• Bank of Scotland

• Barclays

• Halifax

• HSBC

• Lloyds Bank

• NatWest

• Post Office

• RBS

• Santander

• Virgin Money

With Help to Buy 2, the government is providing lenders with a guarantee on the top 15 per cent of the mortgage loan so that in a worst case scenario in the event of repossession, the lender would receive funds from government were the property to be sold at below the mortgage value.

For borrowers, Help to Buy loans work like any other. The guarantee is provided to the mortgage lender by the government - not to the buyer. It is not available on a shared ownership or shared equity purchase.