This week, the Government launched the second part of its Help to Buy scheme to much fanfare (and some controversy). Its idea is to support those who have sufficient income to repay a mortgage, but are struggling to get a big deposit.
The most important bit to get your head around is that for someone getting a mortgage, the fact it’s Help to Buy or not is irrelevant.
In a nutshell, this ‘mortgage guarantee’ scheme provides an insurance policy for mortgage lenders. So if you put up 5% on a home worth less than £600,000, the Government covers the lender for a further 15% in case of problems. So the lender is effectively only taking a risk as if you had a 20% deposit.
This matters, because for the lender, giving you a mortgage is partially a bet on house prices. All mortgages are ‘secured loans’, meaning if you can’t repay, they get your home.
So in simple terms, if you’ve only a 5% deposit, if you defaulted, house prices would only need to drop a little before it wouldn’t be able to recoup the full loan. Yet with a 20% effective deposit, it’d need a full market crash to make a loss.
As the Government guarantee means lenders are taking less of a risk, they can therefore offer more mortgages at 95% LTV (ie, a 5% deposit), and that’s the big impact of Help to Buy.
There are already 5% deposit mortgages being offered, just not that many of them. With Help to Buy we should see more, and as there’s more competition, rates are sneaking down a touch (not a lot, it’ll still be relatively expensive compared to getting a bigger mortgage).
And that’s pretty much all you really need to know. If you have only got a 5% deposit and have worked out that getting a mortgage is right for you, you just need to look for a 95% Loan To Value (LTV) mortgage in the same way you always would (see our free First Time Mortgage guide). Some will be will funded through Help to Buy, others won’t – but that’s irrelevant for your decision.
What counts are the fees, rate and terms. So if the best 5% deposit mortgage is Help to Buy, and it’s right for you – great, go for it. If it’s not, go for the other. The fact it’s Help to Buy gives YOU no greater or lesser comfort.
PS. If you’re going for the original Help to Buy (equity scheme) which is only for new-build homes – that really is very different, as when you sell, the Government gets a cut of your sale price to repay the bit it lent you. This blog is only about the new Help to Buy (guarantee scheme).
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