Help to buy mortgages for first time buyers explained
The gap between salaries and house prices may have stopped growing quite so rapidly, but it still leaves the gap just too large for many people to even begin to contemplate getting onto the property ladder. Trying to save up a 20% deposit whilst paying rental prices that can be a couple of hundred pounds more than you would be paying on a mortgage can be incredibly frustrating as you are essentially throwing away money that you could be investing in a property of your own.
Options for first time buyers
Fortunately for first time buyers the government has recognised that this is an issue and has put together the Help to Buy scheme that is specifically designed to help people who do not have a large deposit to get onto the property ladder. The Help to Buy Scheme has two components to it. The first is the Help to Buy Mortgage Guarantee and the second is the Help to Buy Equity Loan.
How do I find out if I qualify?
The qualification criteria are easy to find on the internet, but the key elements you must meet are as follows: you must have a deposit of at least 5% of the property value that you wish to purchase; the property you are looking to buy must have a value of £600,000 or less; and finally you must be purchasing the property as your main residence so you cannot use this scheme for a buy to let property, or to buy a property as a second home.
The help to buy mortgage guarantee
The great thing about the Help to Buy mortgage guarantee scheme is that most of the big mortgage lenders in the UK have signed up to be part of the scheme, so you should have a reasonable choice of mortgages and lenders available to you. The way these types of mortgage work is that the government actually acts as a guarantor for you on any borrowing over 80%. This means that you are able to get a mortgage with as little as a 5% deposit because should you default on your payments, the government guarantees to pay the lender the % over 80% of your loan.
You will be glad to know that this will only ever come into play if you get into difficulties with your mortgage and if you make all of your payments on time then you will see none of this and can just approach your mortgage repayments in the same way as any other mortgage. Therefore you will be responsible for the repayment of the whole loan over the term of the mortgage. The major benefit of this scheme is that in a risk averse financial climate, lenders are provided with a lower risk option due to the government guarantee for any borrowing over 80% of the property price.
The help to buy shared equity mortgage
The Help to Buy equity mortgage scheme is slightly different to the mortgage scheme as you will be provided with an equity loan to boost your deposit to 25% in order to then secure a standard mortgage. The criteria to qualify for an equity loan are slightly different to than for a Help to Buy mortgage. In addition to the qualification criteria already mentioned, in order to qualify for an equity loan you also have to buying a new build property. The process is then that you provide a deposit of at least 5%, which is then topped up with a government equity loan of 20% of the price of the property, which then leaves you with a minimum of a 25% deposit to then be able to apply for a standard mortgage on the remaining 75% of the property.
You do have to be careful with an equity loan due to the interest rates that are charged on the loan. You get five years of having the loan interest free, but from the sixth year you then have to start paying interest. It is very important that you understand that the interest rate will increase every year, and so will the size of the equity loan, so this is really only a cost-effective option for people who can use the loan to reduce mortgage payments enough by getting a good interest rate on the mortgage to then save up enough to be able to pay off the loan and switch the entirety of the borrowing to a mortgage. While the interest addition to the loan may be reasonable for a couple of years, you will find that it will grow increasingly quickly and could be very substantial after 25 years, which is when it will need to be repaid in full.
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