How does Help to Buy actually work?

published 22 October 2013

You'll probably know how we feel about the second phase of Help to Buy, the government's new house price support mechanism. We aren't keen.

We would prefer that people were able to buy affordable homes, rather than that they were offered affordable loans to buy over-priced homes.

But just because we don't like the policy, doesn't mean that those of you who are determined to buy a house or help someone else buy one shouldn't take advantage of it.

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So how does it actually work? The idea is that the scheme offers people with a 5% deposit help to buy an old or a new house up to the value of £600,000, as long as they own no other property (and don't buy more while they are in the scheme).

The key difference between this and an ordinary mortgage is that the government indemnifies 15% of the loan, something that (alongside your 5% deposit) gives the banks a 20% buffer against losses.

However, getting a mortgage under this deal won't (quite rightly) be as easy as it sounds. According to Richard Dyson in The Daily Telegraph, the loans won't just be about the deposit. There will be no interest-only mortgages. Anyone with county court judgments or a history of missing payments is likely to be excluded.

There will be "strict caps" on income multiples, and "tough limits relating to the amount of income borrowers have to spare at the end of the month". At the same time "lenders will be making allowance for a substantial possible increase in mortgage rates".

So look at the assumptions that the Royal Bank of Scotland (RBS) seems to be making and someone earning, say, £35,000, would be able to support a mortgage of around £170,000. That might seem a lot to the old-fashioned among us (being nearly five times earnings), but it isn't going to buy much in the southeast of Britain.

It is also worth noting that the rates aren't great either. RBS is offering rates between 4.99% and 5.49% with no up-front fees (the latter is a five-year fixed deal), and the Halifax is offering a two-year fixed deal at 5.19%. Theses rates barely beat those on offer from lenders not using the Help to Buy scheme.

This means that turning to Help to Buy shouldn't be automatic for first-time buyers. If you can raise a 10% deposit, you should be able to get a better deal from a mainstream lender. Even if you can't raise this much, you might still look elsewhere.

As Jessica Winch points out also in The Daily Telegraph the Yorkshire and Clydesdale Banks are offering a three-year fixed rate at 4.99% to those with only a 5% deposit. That matches the NatWest Help to Buy rate, but lasts a year longer.