Q&A: Help to Buy mortgage scheme

Help to Buy scheme in window
Image caption A number of lenders have signed up to offering mortgages under Help to Buy

The government says that its Help to Buy scheme will assist people trying to get on the housing ladder who can afford mortgage repayments but are struggling to raise a deposit.

But critics say that the government guarantee, that forms part of the second phase of the scheme, could create a housing bubble in the UK.

Not all mortgage seekers will be able to sign up, and those who do will still have to go through "rigorous" affordability checks by their lender.

Haven't I heard about this for a while?

Yes, in fact some parts of the scheme have been operating for nearly a year.

The first phase started in April 2013 in England. This sees the government offering a 20% equity loan to buyers of newly-built properties. These buyers must offer a 5% deposit.

A similar scheme began in Scotland at the end of September 2013, and another scheme for houses of up to £300,000 began in Wales in January 2014. The Scottish scheme only covers properties up to the value of £400,000, whereas the English scheme covers properties up to the value of £600,000.

In March 2014, George Osborne announced that the equity loan scheme in England would be extended to 2020. It had been due to end in December 2016.

But that's not all, is it?

No, the second phase of the scheme, originally planned for January 2014, was brought forward, and began in October 2013.

Under this system, borrowers across the whole of the UK can put down a deposit of as little as 5% of the property price. The lender offers a mortgage covering the other 95%.

Lenders can sign up to the Help to Buy scheme and pay a fee to the government, which will provide a seven-year taxpayer guarantee covering 15% of the loan value. That guarantee can be called in if the borrower defaults.

It is available for properties sold for up to £600,000 in the UK. The scheme is expected to continue for three years, and has not been extended.

Are the lenders keen?

RBS and Lloyds Banking Group - both of which are taxpayer backed - are participating in the second phase of Help to Buy, as is HSBC, Aldermore, Woolwich, Santander and Virgin Money.

Nationwide Building Society and Monmouthshire (for the Welsh scheme) are offering loans under the first part- the equity loan scheme.

How much do these mortgages cost?

RBS and NatWest are offering a two-year, fixed-rate mortgage starting at 4.99% for those with a 5% deposit, with no fee.

Halifax is taking applications at a rate of 5.19% with a £995 fee for those with the same deposit.

HSBC is offering a rate of 4.79% for the same type of mortgage, with a £99 booking fee.

That is relatively competitive compared with prices outside of Help to Buy, although borrowers are likely to get a better deal if they save up longer for a deposit.

Is there a chance of a return of irresponsible lending?

The government says that various rules have been included to ensure this does not happen.

For example, no interest-only or offset mortgages will be allowed. The system cannot be used for the purchase of second homes or for mortgages for buy-to-let investors.

In addition, lenders must put these borrowers through new affordability checks. These were brought in for everyone to avoid a return of the reckless lending of the last boom.

You mention boom, isn't this creating another one?

That's the fear from many commentators who say that Help to Buy is simply going to help some relatively well-off people move up the housing ladder.

Critics, including Labour, say that this does nothing to tackle the shortage of affordable homes to buy, so it wants more focus on house-building.

Treasury officials suggest that the system was designed to correct a failure in the market and stimulate builders to get going again with bricks and mortar.

The Bank of England is keeping an eye on the second phase of Help to Buy, along with the housing market as a whole. Every three months a committee meets and can make recommendations to government about extending or paring back the scheme.

The Bank may also require banks to keep within certain lending boundaries, if it feels the market is getting out of control.

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