5% Deposit? Help to Buy Explained
What Is 'Help to Buy'?
Help to Buy is a scheme introduced by HM Government to help those looking to take the first steps in home ownership or move up the ladder. It's open to first time buyers and existing home owners, enabling a purchase with as little as 5% deposit. While the mortgage rate may not be as competitive as that for someone with a higher deposit, it might be a viable route if your deposit savings are limited.
Under the Help to Buy scheme there are two options available to purchasers:
Help to Buy Equity Loan
With a Help to Buy Equity Loan, the government loans you up to 20% of the cost of a new-build home. This means you only need a 5% deposit and a 75% mortgage. The scheme is only available from approved builders of new homes participating in the scheme.
Under the scheme, the home will be in your name so you can sell it at any time. But remember, this is an equity loan, so you'll have to pay back the loan amount when you sell your home or at the end of your mortgage period. Whichever comes first. And as the amount to be paid back is 20% of the sale price, you will end up paying back more than the original loan amount if your property has increased in value during your ownersip .
You won't be charged any loan fees on the 20% equity loan for the first 5 years of owning your home. In the 6th year you will be charged a fee of 1.75% of the loan's value, which will increase every year by the retail price index plus 1%.
To summarise:
- Minimum deposit required: 5%
- Available only on new build properties up to the value of £600,000
- On repayment, 20% of the value of the property will have to be repaid
- Property being purchased must be your only property
- Property being purchased must be in the UK
- Available to first-time buyers and existing home owners
- No loan fees during the first five years
Help to Buy Mortgage Guarantee
In October 2013, Help to Buy was extended to make it possible to purchase any new build or resale property under £600,000 with as little as a 5% deposit.
While this option is being currently only offered by a small number of lenders (others may follow) the idea is to increase mortgage availability for those buyers with a minimum 5% deposit, at the same time offering a competitive rate and all without the need for extra paperwork or charges.
The process of applying for and repaying the mortgage is the exactly the same as it would be for a standard mortgage. It's what is happening behind the scenes that makes the difference with the government guaranteeing repayment of the mortgage to the lender.
To summarise:
- Minimum deposit required: 5%
- No maximum income requirement
- Available on new build and resale properties up to the value of £600,000
- Property being purchased must be your only property
- Property must not be shared ownership or under another shared equity scheme
- Property cannot be rented out
- Property being purchased must be in the UK
- Mortgage cannot be an interest-only product
- Available to first-time buyers and existing home owners
- Mortgages available from NatWest, RBS, Bank of Scotland
or Halifax `
What Might I Be Able To Buy?
Why not try our deposit calculator to see which resale properties you may be able to afford with a 5% deposit. Do remember, any mortgage offer is subject to your personal circumstances and will be affected by your income, other credit commitments and financial history. These results are provided for illustrative purposes only. Always seek professional financial advice. Your home may be repossessed if you do not keep up repayments on your mortgage.