Help for those struggling to afford a mortgage will be available over the coming months, Chancellor George Osborne announced today.
The vehicle behind this is a new Help to Buy scheme, which comes in two parts: a deposit towards new-build homes only, and support for mortgages for those with smaller downpayments on any type of property (meanwhile, see our Mortgage and Remortgage guides for what to do now).
The first loans will be available from next month. Here's how they'll work.
Q&A: 20% deposit towards a new-build
- What is this scheme? Anyone who already has a 5% deposit will be able to get an additional 20% as a Government loan.
- When does it start? From 1 April 2013. It will run for three years.
- Who is eligible? Unlike current shared ownership schemes, this will be available to anyone who meets the criteria above — not just the usual group of first-time buyers with household income below £60,000. Of course, you still need to meet lenders' criteria to get a mortgage, which is largely around your income and credit history.
- What interest rate is the loan? It is interest-free for five years. From year six the rate is 1.75%, which will rise annually by RPI inflation plus 1 %.
- When must I pay the loan back? The loan can be repaid at any time within the mortgage term or on sale of the property.
- Which homes will it be available on? It's only for new-build properties that cost £600,000 or less.
- How do I get it? Buyers will be able to access this through participating house builders and HomeBuy agents (from local housing associations).
Q&A: Guarantees for small deposit mortgages (any property type)
Update: 30.09.2013: See the Q&A Help to Buy 95% mortgages launch brought forward by Government MSE News story for updated information on the guarantees part of the Help to Buy scheme.
- What is this scheme? The Government will give a guarantee to lenders to provide mortgages where the loan to value ratio is high (ie, where there is a small deposit). The result is that if a borrower has their home repossessed, the Government will cover some of the losses. The plan is to support £130 billion of high loan to value mortgages via £12 billion of guarantees. The insurance is for the lender, so it does not mean borrowers' payments will be guaranteed.
- What does it mean in practice? Those with small deposits often cannot get a home loan. So if it works, there will be more mortgages available to that group.
- When does it start? January 2014.
- Who will be eligible? Anyone with a deposit of less than 20%, on any type of home. Of course, you still need to meet lenders' criteria to get a mortgage, which is largely around your income and credit history.
- Why would this scheme help lenders offer these mortgages? Lenders are reluctant to offer high loan to value mortgage because of the risk they will not recover money if the borrower misses payments, subsequently has their home repossessed, which is then sold for less than the amount the lender is owed from the mortgage. But if the Government can guarantee some of those losses, it is hoped it will facilitate more lending to this group.
- How do I get one of these mortgages? Full information will be published later this year.
'This isn't without risks'
Martin Lewis, MoneySavingExpert.com creator, in an instant reaction based on sketchy details, says: "The hope is the new Help to Buy mortgage guarantee will mean more mortgages offered to people struggling to get them, and with lower deposits, maybe around the 5% level, being available.
"If it works, it should also help those trapped on existing mortgages, who haven't enough equity to cut the cost.
"However, a scheme like this isn't without its risks. More people getting mortgages can push house prices up, which could make getting a reasonably-priced home even more difficult.
"Plus other schemes to boost lending, both for mortgages and small businesses — such as Funding for Lending — have so far had only a limited effect, considering interest rates are at historic lows.
"So only time will truly tell whether the structure of this support for lenders will really see it filter through to mortgage holders and potential home-buyers."
What the mortgage industry says
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "The Help to Buy initiative should provide a significant boost for the housing market. The Budget really will help those who aspire to own their own home.
"It should result in cheaper mortgage rates even though the Government has said it won't be involved in the pricing.
'The extension of interest-free equity loans to those who are not first-time buyers and on new-build properties worth up to £600,000 will enable many more people to move up the housing ladder. We welcome the news that this will be launched from next month as there really is no time to lose."
For further information on all the government backed mortgage schemes on offer read the Mortgage Schemes guide.