RECENT government initiatives could help you make great savings and get into your own home earlier. Before launching into the Help to Buy scheme just announced by the government in budget week, let’s take a wider view of all the schemes out there.
Assuming you are interested in buying a place to live in the UK, it’s a good thing to know that depending on where you live, there are several home-buying schemes available, ranging from mortgage assistance to schemes for buying housing association or council flats at a discount.
OK, deep breath. Let’s start with a quick overview.
Housing association and council flats
If you have been the tenant of a council owned flat for five years in total (not necessarily consecutive years) then you are potentially eligible for the Right to Buy scheme. Under this scheme you could receive a maximum £100,000 discount off the market value (London Borough), or £75,000 discount (non-London Borough) when buying your home from the government. Plans are in place to reduce this minimum period to three years tenancy but that will take some time. That’s a handsome discount not to be ignored, ensuring your home value is well above the purchase price from day one, and you have some good equity, regardless of your borrowing ability.
More information and handy question-and-answer tables are on the Right to Buy website.
The Right to Acquire scheme applies to tenants of housing association properties only (and for properties of a certain age and history as a housing association property). Discounts available are between £9,000 and £16,000 of the purchase price.
A variation of this scheme, called Social Homebuy, allows tenants without the ability to afford to buy all of their housing association property to buy a portion of it and rent the remaining portion, and essentially still receive the Right to Acquire scheme discount.
The schemes for the rest of us.
The NewBuy scheme assists all of us with low deposit amounts (5%) and essentially guarantees access to a 95% loan from a scheme lender, if you meet the lender’s criteria to borrow in the usual way. Why will lenders lend in this scheme such high percentages when they won’t lend it elsewhere today? Because the government will underwrite the loans and protect the lender from the risk of negative equity after a repossession of a home, and ensure they do not lose their money.
The scheme only applies to newly built homes and must be designed to encourage builders to continue to build new homes. The government expects demand for new property stock to increase as a result. It also helps the government influence the market more quickly; since there is no house-buying chain to worry about and hence transactions will proceed more quickly. Each approved builder in the scheme is aligned with specific lenders, so if you like a specific property, make sure you understand who the lender is and if they will preapprove you for a 95% loan first. Ordinary loan assessment criteria applies.
Help To Buy Schemes
Variation 1 — equity loans
How does it work? Well essentially the government steps in as a second lender, giving you an interest free loan for a portion of the purchase price — and you pay for the rest with your deposit plus a regular loan from a bank.
The property again has to be newly built, and you buy it with at least 75% from the bank, and your own deposit of at least 5% of the purchase price. The rest is paid for by the government through an equity loan.
Helpful tip no.1: The property price upper price limit is £600,000 to be eligible. This is going to rule out many centrally located and luxury-type apartment buildings with unique features and in unique locations.
In the sixth year of ownership the government will commence to charge you an “Equity Loan fee” of 1.75% of the loan amount — another name for interest on the loan which the government has extended to you since inception.
Helpful tip no. 2: Paying down the loan as quickly as possible will be rewarding, since after five years your help-to-buy loan changes from a no-interest loan to a fixed interest loan at 1.75%. (Well that’s 1.75% today).
Given that the maximum purchase price for the scheme is £600k and the government lends a maximum 20%, the highest value loans out there will be £120,000 per property, meaning the most interest being paid after five years is £120,000 x 1.75%, or £175 per month. Since each borrower will need to come up with their interest payment s when five years has expired, make sure to budget for it, whatever your purchase value.
Helpful tip no.3: Since the loan is interest free for five years only, the loan could be quite useful where you are expecting to receive a lump sum amount sometime in the next five years but you are not sure when. For example you may be due proceeds from a family trust, a family member’s estate or even share options or bonus money from your employment. The Help to Buy scheme helps you effectively borrow this money and you can pay it back when that lump sum comes in, and therefore avoid paying a large part or all of the interest payments due to the government after five years.
The homes eligible for the scheme cannot be let, so there are no investment property related incentives, at least while it’s in the original buyer’s name and the government’s loan exists — so buying such brand new properties for investment purposes is not possible, at least until it is on-sold.
Helpful tip no. 4: This fact about Buy-To-Let is especially important to note if you intend leaving the country but keeping the property. As long as you have a loan you won’t be legally allowed to let it out. Both the bank’s and the government’s conditions will need to be reviewed very carefully, before you fly off with the plan to keep the property for future investment.
Variation 2 — guarantee scheme
From January 2014 the government will introduce Help to Buy Mortgage Guarantor schemes for UK citizens or those with the right to remain in the UK for properties costing £600,000 or less. Like the NewBuy scheme the government provides guarantees for lenders so that buyers of property can borrow potentially up to 95% of the purchase price — however with this scheme you can choose from existing property as well, it need not be new. You won’t be able to use the scheme for second homes or BTL properties (only your main home), however you don’t have to be a first time buyer or be subject to maximum income restrictions to qualify.
Hopefully you got something out of this summary and can potentially use one of these schemes to help you buy your own property in the UK.
Daniel Shillito is an overseas mortgage broker, CPA and Expat specialist at Aussie Finance and Property Group. Daniel can be contacted on Ph. 020 3239 0479 or visit www.aussiefpgroup.com