Q&A: Help to Buy 95% mortgages launch brought forward by Government

Prime Minister David Cameron has revealed the second part of the Help to Buy scheme will launch within the next week, far earlier than expected, and will initially be available under state-backed banks NatWest, RBS and Halifax (take a look at our Mortgage Schemes guide to understand your options).

It's important to understand many details are still yet to be announced, but here are the basics...

Q. Hasn't Help to Buy already been around for a while?

A. Help to Buy has two totally separate parts to it. It would've been far easier had they called them by different names.The first part, which launched in April, was designed to encourage people to buy new-build properties, to help encourage an end to the housing shortage. There, the Government started offering equity loans of up to 20% of a property's value to people buying new builds worth up to £600,000 in England and Wales, with a 5% deposit of their own. The loan is interest-free for five years, and then interest builds yearly (full details in the Help to Buy (new-builds) launch MSE News story). From now on - when we talk about Help to Buy, we're not referring to the original new-builds scheme.

Q.

So what exactly is the new scheme?

A. The idea is lenders will offer more mortgages to those with smaller deposits, as long as they have at least a 5% deposit, so the remaining 95% is a mortgage.

At present, there are very few 95% home loans available. This is because lenders are afraid they will lose money if those homeowners miss payments, the home is repossessed and the lender fails to sell it for a large enough amount to cover the outstanding debt.

Q. How will the Government encourage lenders to offer 95% mortgages?

A. To facilitate more 95% mortgages, the Government will provide a guarantee to lenders to cover a share of any losses a lender incurs when it repossesses someone's home.

This will be in the form of a Government insurance scheme. Lenders who use it effectively buy insurance with a fee, just like a motorist would pay a premium to buy car insurance.

A total of £12 billion is expected to be paid into this insurance fund by lenders over the first three years.

You usually need a 10% deposit to get a mortgage, 25% to get a good rate and 40% for the top rates.

Q. When does it start?

A. The first lot of these deals should be available from next week but none of the lenders who have signed up to the scheme so far have released a date. Once you apply for a mortgage you can complete the purchase in the same time-frame as a standard mortgage, but the guarantee only kicks in on 1 January.

However, that's a arbitrary date as it would be virtually impossible to fall into arrears and have your home repossessed for a mortgage where you've not even started the application by early October.

Q. Who can get one of these mortgages?

A. Anyone with a deposit of at least 5% of the property value but less than 20%, on any type of home up to £600,000. However, lenders will still take into account your income and credit score before offering a mortgage.

Q. How can I get a Help to Buy guaranteed mortgage?

A. In some ways, this question doesn't make sense. Instead, think of it like getting a normal mortgage, but the reason the lender will be offering that deal is because it has the insurance from the Government. Without the insurance, that mortgage wouldn't exist. You shouldn't notice too much difference from a standard deal, as much of the work is done behind the scenes between lenders and the Government.

Only NatWest, RBS, Bank of Scotland and Halifax have signed up to offer Help to Buy mortgages, but others are expected to join in the coming months. Lloyds Bank and the new TSB bank will offer 95% lending from January, according to Lloyds Banking Group.

Q. What are the mortgage rates going to be?

A. We asked the lenders so far signed up for details of Help to Buy mortgage rates but neither were able to provide this information. So we asked MoneySavingExpert.com creator Martin Lewis for his view:"There are already 95% mortgages available but they are seriously expensive - with rates on average around 5.5%. The whole point of this scheme is to increase competition in this area which, coupled with the fact that the Government is guaranteeing some of the mortgage, should bring rates down.  “However to balance that, it looks like lenders will have to pay a fee to access Help to Buy which could push it up.

"Overall, I still suspect it will mean access to some cheaper rates for those with small deposits than now - though I'd be very surprised if they were close to the best deals on the market. For that you're still going to need substantially more - 20% or even 40%. Only time will tell."

Q. What should I do if I think one of these mortgages is right for me?

A. Martin says: "Bide your time for the moment and wait until enough of them are launched for the rates to start to come down. However it is the perfect time to start preparing. This means things like ensuring your credit reference files are error-free and maximising your savings for a deposit."

For more help on this, see our First-Timers' Mortgage Checklist and the First-Time Buyers' Mortgage Guide to understand how to get a mortgage.

Q. Is Help to Buy available in Scotland? A. A similar scheme to part one of Help to Buy was launched in Scotland today, with the Scottish Government contributing up to 20% of the purchase price of new-build homes worth up to £400,000.

Defence Secretary Philip Hammond has announced a forces version of the scheme, where members of the armed forces will be able to claim an interest-free loan worth up to half of their salary to contribute to a deposit.

Q. Is the Help to Buy scheme a good thing?

A. The proposal has been extremely controversial. Even Business Secretary Vince Cable has raised concerns about the impact on house prices - and some are worried that this interference in the market place could be bad for the economy. Martin comments: "We're only five years after the huge economic downturn caused primarily by people taking out mortgages they couldn't afford. So it's quite eyebrow-raising to see the Government encouraging those with smaller deposits to buy properties. "For individuals looking to get these mortgages, the first thing to do is to ensure you genuinely are able to afford the repayments. Don't think renting is a dirty word and that you must get on the housing ladder. Ensure your finances are strong enough - buying a property which you can no longer afford to repay and get repossessed later is far worse than renting."When it comes to looking at the risk factors - remember interest rates aren't just low right now, they're 2% lower than the previous 200-year historic low.

"So ask yourself what you would do if UK rates and your mortgage jumped by 4%. Could you still afford to repay? See our Mortgage Calculator for help. This isn't meant to scare you - more to show it isn't as simple as bagging a mortgage just because you can. There are pros and cons. "The final concern is that if Help to Buy really takes off, so many new people coming into the housing market will cause substantial house price inflation (prices are already rising) cutting many future new buyers off, not because of lack of deposit but because of lack of affordability. And if house prices overheat too much, there is then always a risk of a crash."