A big question you may have is can I get help to buy as a Contractor?
Well, the answer is… Yes! Though a little different to an employed first-time buyer, you shouldn’t rule out help to buy.
Help to Buy schemes have been set up by the Government and are designed to help potential buyers struggling to save for an initial deposit for their first home or for those trying to move up the property ladder if they have little equity.
Our guide explains the different schemes available.
What’s in the guide?
- What is ‘Help to buy’
- Other options
- Who is eligible for the schemes?
- The restrictions on the scheme
- Fees and charges involved in the mortgage process
- Ask the expert
What is Help to Buy?
The Equity Loan scheme is where the government loans the property buyer up to 20% of the cost of a new-build home so that with a 5% deposit, they will only need a 75% mortgage to secure the rest of the property. For example, if you purchased a home for £200,000:
- You would take out a mortgage for 75% – £150,000
- You would pay a 5% cash deposit – £10,000
- The Government would provide an equity loan for the remaining 20% – £40,000
The equity loan given by the government is interest-free for the first 5 years and after that time the property owner will pay a fee of 1.75% per year, rising annually along with the Retail Price Index (if any) plus 1%.
From 1st February 2016 for new home buyers in the London boroughs, the Government has increased the upper limit for the equity loan it gives from 20% to 40%.
Who is eligible?
This scheme is eligible for both first-time buyers and existing homeowners looking to move into a new build house. You can purchase a property up to a maximum value of £600,000. You must not own any other property and the mortgage you take out must be a repayment mortgage, not interest-only. The scheme is set to run until 2021.
Help to Buy: ISA
In December 2015 the government launched a ‘Help to Buy: ISA (Individual Savings Account)’ to help first time buyers save for a deposit. Putting your money into the ISA allows the government to boost your savings by 25%, with their contribution capped at £3000 (i.e. you save £12,000 and they will top it up with a maximum of £3,000, to give a total of £15,000).
The ISA allows you to save up to £200 a month, as well being able to deposit a lump sum of up to £1,200 in your first month. The Help to Buy ISA is available for new savers until 30th November 2019, however you can still keep saving in your account if you opened it before then. You must, however, claim your bonus by the 1st December 2030.
Who is eligible?
To qualify for this ISA, you need to be:
- Over the age of 16
- Be a UK resident
- A first-time buyer
- Not have another active cash ISA in the same year
Other stipulations include:
- Have a National Insurance number
- Not have another active cash ISA for the same tax year
- The property that you invest in must be based in the UK, cost up to £250,000 or £450,000 in London and must be purchased with a mortgage.
- You can use this scheme alongside other schemes including the Equity Loan and Mortgage Guarantee.
Shared Ownership schemes allow buyers to get onto the property ladder by offering them options to purchase a percentage of a house whilst renting the remaining percentage. The scheme usually offers a purchase option of between 25 – 75% of the property to begin with, with options to purchase more in the future (known as ‘staircasing’).
It’s best to bear in mind that each country in the UK has its own Shared Ownership scheme, and each are run a little differently from each other.
Remember that for Shared Ownership schemes, although you own only a share of the property you still have to pay all of the maintenance costs.
Who is eligible?
You are eligible to purchase a home through Help to Buy: Shared Ownership in England if your household earns £80,000 a year or less outside London (£90,000 a year or less in London), if you are a first-time buyer, you used to own a home but can’t afford to buy one now or are an existing shared owner looking to move.
If you are aged over 55, you will be able to access help from the ‘Older People’s Shared Ownership’ scheme. This is similar to the regular Shared Ownership scheme, but it only lets you buy 75% of the property. Once you own that 75%, you won’t have to pay rent on the remaining 25% of the property.
Are there any restrictions?
The Help to Buy schemes were not set up for people to buy second homes with, or to purchase properties that you intend to rent out (i.e. Buy to Let). They also cannot be used for anyone who is already using or going to be using another home buying scheme. However, you can use the Help to Buy: ISA alongside the Equity Loan OR Mortgage Guarantee schemes.
What are the risks for Contractors and Independent professionals?
For many, new home builders that offer properties under the ‘Help to Buy’ scheme try to persuade buyers to use their own approved brokers, rather than seeking specialist advice. However, this route can be disastrous for contractors, business owners and independent professionals seeking a mortgage. A non-specialist mortgage broker may have doubts about your ability to borrow sufficient funds to proceed with the sale. As a result of this, the affordability will be assessed via trading accounts or payslips, and a large portion of your income could be ignored.
Fees and charges
Before deciding if a Help to Buy scheme is for you, you will also need to make sure you are able to afford all the costs of homeownership. These include but aren’t limited to:
- Mortgage fees
- Moving costs
- Solicitors fees
- Stamp duty – paid on properties priced over £125,000, relief available for first-time buyers
- Maintenance costs
All information correct at time of writing and sourced from official government Help to Buy website: https://www.helptobuy.gov.uk/
Please note, expressions made do not constitute advice and it is the responsibility of the reader to seek advice for their independent needs.
Ask the expert: Help to Buy Schemes
One of CMME’s senior Mortgage experts, Dale Parry explains the pros and cons of Help to Buy schemes and what the alternatives are….
Is Help to Buy for me?
In simple terms, Help to Buy was designed to help potential home buyers, struggling to raise the required deposit for a mortgage. Typically Help to Buy schemes appeal to first time buyers wanting to get on the property ladder but can also help existing homeowners upscale to their next home.
How does it work?
There are different schemes available, but one of the most common is the Help to Buy Equity Loan, available on new build properties.
The principle here is that the Government contributes up to 20% (40% in London) of the value of the property by way of a loan, which is interest-free for the first 5 years. The home buyer then pays a 5% of the property value as a deposit, so needs only a 75% mortgage loan.
Who can apply for the HTB Equity Loan scheme?
The scheme is available on new build homes only; up to £600,000 in England, £300,000 in Wales and £200,000 in Scotland. It is open to first-time buyers and existing homeowners, provided the home you buy is your only residence and you are not buying it to let out for investment purposes (buy to let).
To be accepted, you must apply through a dedicated Help to Buy Government Agency who will qualify your eligibility before applying for a mortgage. For full details visit www.helptobuy.gov.uk
What are the pros and cons?
Help to Buy schemes can enable you to purchase your own home sooner and with potential lower monthly mortgage payments. Plus, with the Equity Loan scheme, you don’t have to make any repayments on the Government loan for the first 5 years giving you a little extra financial flexibility as you settle into your new home.
On the downside, the restrictions around the type of property – newbuilds only – and the fact you can only own one property to qualify could be limiting for some. Plus, property developers and mortgage lenders alike are not obliged to participate in the scheme so it’s worth doing your homework before embarking on your property search.
Lastly, with the Equity Loan scheme, it’s important to note that if the property rises in value, so too will the 20% equity loan meaning your repayments will go up. Plus, if you decide to sell within the first 5 years, you will normally be required to pay back the government loan back in full.
So, what are the alternatives?
The good news is that, as the mortgage market has continued to recover from the ‘credit crunch’ and consumer confidence has grown, traditional mortgage lenders are re-evaluating their stance in the market. New lenders have also emerged and in the last 12 months, we have seen an increased appetite for lending.
This has led to the re-emergence of 95% mortgages, which provides a credible alternative to the Help to Buy schemes.
How do 95% mortgages compare to Help to Buy schemes?
With both options, the buyer is only required to put up a small deposit – 5% of the property value. However, with a 95% mortgage, there is no government involvement, no Help to Buy application forms to complete and you are not tied to a loan that may be increasing with property value.
On the flipside, 95% Mortgage rates will usually be less competitive than those through Help to Buy. But you will likely have greater lender choice with a 95% mortgage so will be able to shop around for the best deal.
Plus, you may be able to reduce your monthly mortgage payments in the early years as more and more lenders are offering longer mortgage terms – up to age 75 in some cases – subject to anticipated retirement age.
Ultimately though, the choice is a personal one based on an individual’s own circumstances and so it’s well worth doing your own research or speaking to a mortgage broker, like CMME, who can help guide you through the options with a free no obligation consultation.
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