The availability of high loan-to-value (LTV) lending plummeted in the wake of the credit crunch and it is the pressure this is placing on buyers to accumulate prohibitive deposits that the government is seeking to address with Help to Buy.
The reduction in high LTV mortgage availability has been reflected in the increase in the average deposit for a first-time buyer. According to HM Treasury average deposits for first-time buyers have increased from around 35 per cent of average incomes in 2006 to just short of 80 per cent in 2012.
There has been an associated reduction in the number of people buying their first home in the last five years. In 2012, HM Treasury reported there were 40 per cent fewer first-time buyers than in 2007.
To help tackle this, one part of the Help to Buy scheme is the offer of 20 per cent LTV equity loans from the government for prospective homebuyers that already have a 5 per cent deposit towards a new build property worth up to £600,000.
But it is not just first-time buyers who have been affected by the lack of high LTV lending. Existing homeowners with low levels of equity in their property are also struggling to move or remortgage onto a more competitive offer.
That is why, unlike previous government backed schemes, the core mortgage guarantee strand of Help to Buy is not limited to first-time buyers – or for that matter to any particular type of property.
The measures aim to increase the supply of low-deposit mortgages for credit-worthy households with deposits of as little as 5 per cent and up to 20 per cent of the value of the property, also up to £600,000.
A mortgage eligible for a guarantee under the scheme will need to be:
• between 80 per cent and 95 per cent loan-to-value (LTV);
• be a residential mortgage, and not buy-to-let;
• be taken out by an individual or individuals rather than an incorporated company;
• be on a property in the UK with purchase value of £600,000 or less;
• be a repayment mortgage, and not interest-only; and
• meet certain minimum requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test.
To qualify for such a mortgage, an adviser’s client must be simply either a UK citizen or someone with the right to remain indefinitely in the UK. They do not have to be a first-time buyer and there is no limit on level of income.
The only limitation is that Help To Buy cannot be used with any other publicly-funded mortgage scheme. Recently David Cameron, the prime minister, announced the Help to Buy mortgage guarantee will also not be available for second homes or foreign buyers.
