The finance of property: Help to Buy scheme explained

Recent figures released by the Resolution Foundation show that just 58 per cent of households in Greater Manchester own their own home, down from 72 per cent in 2003. Similar falls have been experienced in London, West Midlands and Yorkshire as home ownership has fallen to its lowest level in 30 years.

It’s this trend that the Government is trying to reverse with its various Help to Buy schemes.

If you’re struggling to get onto the ladder, then it’s important to get a thorough understanding of Help to Buy to see if you are able to use it to your advantage and overcome the hurdles in your way.

So, what is Help to Buy?

This is the umbrella term given to a series of schemes aimed to help people to afford to get into the housing market.

People are able to apply for an ISA, equity loan, mortgage guarantee or shared ownership.

 A savings boost: Help to Buy ISA

The ISA is geared towards helping would-be buyers to grow the money they have put to one side for a deposit. Savers can earn an extra 25% on the money they save, up to £3,000 – but this is only paid out when they are ready to make their house purchase. In total, £200 a month can be set aside in a Help to Buy ISA – although couples should note that they can have an account each.

Cutting the deposit: Help to Buy Equity Loan

The equity loans available under Help To Buy aim to reduce the deposit that buyers need to save for in the first place.

For this type of loan, Help to Buy properties have to be new-built homes worth up to £600,000. The Government lends up to 20% of the total cost, leaving a 5% deposit required to be able to get a 75% mortgage. Earlier this year, the Government amended the system so that people in London could get up to 40% of the price of the property to reflect the scale of the cost pressure in the capital.

The Government is then paid the same percentage back as a share of your sale price (crucially this is the same percentage, not the same amount. The Government could get back more than it pays).

These equity loans carry no interest for five years, after which interest is charged at 1.75% and rises by a further 1% plus inflation each year.

Helping to secure your finance: Help to Buy Mortgage Guarantee Scheme

Instead of a loan, this scheme offers a guarantee from the Government for a portion of a mortgage, with a view to giving lenders the confidence they need to approve cash for borrowers.

Under this deal the Government is effectively saying that it would step in if things go wrong for the buyer and should allow lenders to accept a lower percentage of the price by way of deposit.

This deal is open for new and old properties.

Getting part way there: Help to Buy Shared Ownership

The final strand of Help to Buy offers buyers a chance to own a share of a home if they cannot afford the total cost.

Buyers will pay for 25-75% of the home and then pay rent on the remainder of the value of their home. There is scope to increase the percentage over time.