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Help to buy mortgage guarantees

Work on the second part of the government’s flagship Help to Buy scheme appears to be firmly underway. Earlier this week, the Chancellor George Osborne invited lenders and house builders to the Treasury to discuss how its mortgage guarantee scheme – which will aim to help first time buyers and existing homeowners with a small deposit buy any kind of property – will work.

Unfortunately, the rest of us are still mostly in the dark about how exactly the scheme, which begins in January, will work in practice. And, if you’ve got a 5% deposit you may be wondering whether it’s worth hanging on until January to see what’s on offer once the mortgage guarantee scheme launches.

Help to buy mortgage guarantees – what do we know so far?

The broad idea of the mortgage guarantee element of Help to Buy is to get people with small deposits onto the property ladder – a struggle for hundreds of thousands at the moment. People looking to buy a house, old or new, worth less than £600,000 with a deposit of at least 5% will be eligible for the scheme. And, unlike previous government schemes, existing homeowners as well as first time buyers will be able to access it.

From the borrower’s perspective, a Help to Buy mortgage won’t be that different to getting a normal loan. You would put down a deposit – of at least 5% – and then borrow up to 95% of the property’s value from a mortgage lender. The government will then guarantee any mortgage borrowing above 80% of the property’s value. For example, if you took out a 90% mortgage, the government would guarantee to repay your lender up to 10% of its value if you defaulted.

For the mortgage providers, lending to people with small deposits will carry much less risk, so it should create more choice of mortgage for borrowers with only 5% or 10% to put down.

But there are still a lot of question marks about what will happen when the scheme launches. Although the government expect lenders to offer more products at lower rates, no-one really knows what products will be available.

Other 95% mortgage options

It is worth considering what your other options for buying a house might be. The equity loans part of the Help to Buy scheme is already live and could help you to buy a new-build property – provided you have a deposit of at least 5%.

The government will lend you up to 20% of the value of a new-build property and you use your deposit and a mortgage to cover the rest. You would then repay the market value of the loan when your mortgage ends or when you sell the property – whichever comes first. It’s a bit different to other loans, as you’re not agreeing to repay a cash amount – rather, a percentage of the property’s value.

So, if you took out a 20% equity loan for a £100,000 house, and in 25 years’ time the house was worth £150,000, you would repay £30,000, not £20,000. Equally, if the property dropped in value you would repay less.

There are also ordinary 95% mortgages on the market at rates of around 5%. You may also wish to consider getting help from family – there are an increasing number of mortgages on the market where parents and other family members can help you onto the property ladder without having to hand over any cash.

So, if you’re keen to get onto the property ladder and have a 5% deposit you may not need to wait until January to buy a house. But, equally, if you’re not in a rush it may be worth waiting to see what the result of the scheme is – you may also be able to save a bigger deposit in the meantime.

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