Published 25 July 2013 · Last reviewed 25 July 2013 · Older article — see current rates

The Government Help To Buy Scheme. How Does It All Work?

Unlike the normal rhetoric that flows easily from the spin doctors –  the Government Help To Buy Scheme is designed to assist first time and next time buyers looking to purchase a new build property – and has been supported by practical help rather than hot air.

It really is a win, win, win all round. How so? Well the market needs simulation and traditionally the thrust comes directly from first time buyers who are the principal target audience for the initiative. The builders have been sitting on their hands. And, of course it scores valuable election points at a key time. The equity stake the Government take in return for the 20% ‘interest free’ loan also has a built in upside when the property is sold as the Government will take a share of the property value appreciation which has helped them sell the concept to the opposing political parties.

How Do I Qualify For The Help To Buy Scheme?

Well there are five main considerations:

i) You will need a minimum of 5% deposit and depending on the mortgage lender this could be a gift from family.
ii) The property choice is restricted to a property that has been built in the last few years and has not been previously occupied.
iii) You must a British National and Resident.
iv) You must not own another property at the same time as this one.
v) You must have a prefect credit record.

You can then apply for an ‘equity loan’.

How Does The Help To Buy Scheme Work?

Well if you imagine a pie there are three slices:

a) Your 5% deposit.
b) 20% interest free ‘equity loan’ from the Government.
c) 75% mortgage from a participating lender.

There is no interest payable on part b for the first 5 years. After this period if the property remains unsold the Government charge a nominal interest rate of 1.75%pa, which rises annually by RPI inflation plus 1%.

When the property is sold or the mortgage expires the ‘equity loan’ must be repaid in full together with a share in the appreciation of the property. See Table below:

Original Purchase Price £200,000	Property sold for £230,000
Your deposit £10,000 (5%)
Equity loan £40,000 (20%)	Equity loan to be repaid £46,000 (20% of the revised property value)
Mortgage £150,000 (75%)

How Do I Arrange The Mortgage Element of a Help To Buy Scheme?

After successfully obtaining approval from the Government for the ‘equity loan’ you are in a position to sort out the mortgage. The lender’s are stumping up the significant part of the transaction (normally 75%, although you can contribute more as a deposit if you want) so they will not be easy to please. To further complicate matters you will not have the pick from all of the UK lenders as there are only a ‘handful’ of players that offer funds for this purpose.

The lenders will be picky and it is better that you make the right choice first time otherwise a black mark will be left on your credit file which can be off-putting to the subsequent lender(s).

An experienced Mortgage Broker should be able to match your individual circumstances to the correct lender to avoid such an eventuality and therefore save money, time and potential disappointment.

Payam Azadi is a partner at Niche Advice Ltd who are Independent Financial and Mortgage Advisers in London.