Should I use Help to Buy to buy a home?
Tue 15 Oct 2013
The second part of the government's Help to Buy scheme is about to be launched. It will offer banks and building societies a taxpayer-backed guarantee to help them make more mortgages available to people with small deposits.
Can I use it?
Yes, if you meet certain criteria. In theory, the scheme is available to help first-time buyers, movers and those who want to remortgage, and can be used on properties costing up to £600,000 so a wide number of people will be eligible.
However, lenders will need to make careful credit checks before they offer loans. The Treasury has already specificed that anyone who has a county court judgmentagainst them for more than £500 relating to three years before they apply will not be able to use the scheme, and there could be other terms and conditions along these lines.
Banks and building societies typically do not like you to borrow your deposit, so you are likely to be refused a loan if you have not saved it up or are borrowing it from someone, nor do they like blemishes on your credit record. And if you are self-employed they typically expect you to be able to show at least two years' accounts. These and other criteria will probably be applied to these new loans.
Can I use it to buy a buy-to-let home?
No, nor can you use it to buy a holiday home or any other kind of second property. The lender will expect you to sign something saying that the property in question is going to be the only one you own and where you intend to live.
Who is offering the mortgages?
At first, RBS, NatWest and Halifax will be the only banks offering mortgages under the Help to Buy scheme, although others are set to join in. They are not the only lenders offering 95% loans, though, so if you have a small deposit you do not necessarily have to use a Help to Buy loan. You should certainly compare the deals on offer before you commit.
What deals are on offer?
The Help to Buy home loans are still under wraps. Mortgage brokers have speculated that they could have rates of upwards of 5% – lenders will pay a fee for the guarantee which they will probably pass on in the form of a higher interest rate (adding a big upfront fee could negate some of the point of offering a 95% loan). However, they will be getting capital relief on the loan – this is to do with how much capital they need to hold in their reserves to back the loan, and means that high loan-to-value (LTV) mortgages usually cost them more to offer. This should offset some of the cost and mean that Help to Buy loans are at least as competitive as existing 95% mortgages.
How much do existing 95% mortgages cost?
The few deals on offer to borrowers with just 5% to put down as a deposit are generally fixed-rate mortgages with interest rates ranging between 5% and 6%. Newcastle building society has a two-year fixed-rate deal priced at 5.95% with a £195 fee, but you can pay less if you fix for longer (which seems quite sensible as rates seem unlikely to move up dramatically in the next couple of years). Yorkshire Bank has a three-year fixed-rate at 5.49% with no fee, but that is only for first-time buyers, while Hanley Economic building scociety is offering a fixed-rate of 5.69% for five years with £300 of fees (although the maximum loan size is £250,000).
Should I buy now or wait?
This is the big question. Help to Buy hasn't changed the fundamental things you need to consider before you commit to a house purchase:
• Can you afford the deposit and the other fees associated with buying (stamp duty, solicitor fees etc)?
• Can you afford the monthly repayments?
• Can you still afford the monthly repayments if interest rates go up? Use our calcualtor to test different scenarios.
• Can you afford to buy somewhere "future-proof"? For example, if you can only afford a studio flat, will you be happy there for a while or itching to move in a couple of years time?
• How secure is your income?
If you feel happy about all of those things, your decision will concern the cost of the property and the mortgage. On the cost of the property: in some areas of the country prices are going up, so you might feel you want to dive in before they rise any further. Do not panic into buying something you don't want though – prices are being driven up in some areas by a lack of homes on the market, and more sellers may come out of the woodwork as the scheme beds in. In many areas prices are not rising as quickly as the headline figures suggest, so you shouldn't feel under pressure.
The first rates available on Help to Buy mortgages might not be the best. As more lenders start offering the loans competition in the market will grow and could well push rates down. It might be worth sitting tight until there are more deals to choose from.
What else should I consider before taking on a 95% mortgage?
You should think about whether you can afford to save more. Interest rates are generally better if you have a bigger deposit, and this will continue with Help to Buy because lenders will pay less for guarantees if they are offering loans at a lower LTV.
Currently, if you can raise a 10% deposit, Nottingham building society offers a five-year fixed-rate deal priced at 4.39% with £300 in fees. On a £170,000 loan, that will mean repayments of £840 a month – around £170 a month less than on a 95% mortgage from Hanley Economic at 5.69%. As well as being more affordable each month, it will also mean the mortgage costs you thousands less over its course.
Saving a bigger deposit also gives you more of a buffer if house prices fall. The mortgage guarantee offered by Help to Buy is not for you, but for the lender, and is only used if you default on your mortgage and the lender has to repossess. Having a bigger deposit will mean that if prices drop slightly you will not be trapped in a property by negative equity.
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