Help to Buy scheme - How to apply

More than 48,000 people have now taken advantage of the government's Help to Buy scheme - offering loans to people who are struggling to get a mortgage because they don't have a big enough deposit. It has had a profound effect both on those who were unable to get onto the property ladder, and on the housing market itself.

Since the scheme was launch, Help to Buy has accounted for 6% of all property purchases. It's one of the reasons why property prices have risen 11% in the past year, and although the numbers of traditional mortgages being granted are rising they are still a long way off the levels we saw before the financial crisis.

Can you take advantage?

If you want to join the thousands who have used Help to Buy, you need to understand how the scheme works.

It was launched by the government in April last year, and comes in two parts. The first is an equity loan, which has been used by almost 30,000 borrowers since the scheme was launched. Under this part of the deal, borrowers who want to buy a brand new property, and have a 5% deposit, can borrow 20% from the government - interest-free for the first five years.
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It means they only have to borrow 75% from the commercial mortgage market - which gives them far more options than the restricted number of 95% mortgages available. This was initially going to be offered until December 2016, but has been extended to 2020.

The thing to bear in mind with this kind of deal is the admin fee, which starts in the sixth year. This is 1.75% of the value of the loan, and will increase with inflation plus 1%. This will be on top of your mortgage payments, and while you will be paying down the commercial mortgage, the size of the government loan will not diminish, so the administration fees will grow.

You will also need a strategy for how you intend to repay the government at the end of the loan period. Bear in mind that you'll need to pay the market value of the loan rather than the sum you initially borrowed - which means if your property was worth £200,000 and you borrow 20% from the government, you will have borrowed £40,000. However if it's worth £250,000 when you sell, you'll need to pay 20% of that - which is £50,000.

Mortgage guarantee

The second part of the scheme is a mortgage guarantee, which has been used by more than 18,500 people since this part of the deal was launched in October last year. This enables home buyers with a 5% deposit to borrow 95% from a lender.

The way this differs from a standard 95% mortgage is that the lender pays the government a fee, and in return it provides a seven year guarantee covering 15% of the loan value. It means that if the borrower fails to keep up with payments, the government will stump up the 15% of the outstanding loan - which vastly reduces the risks of the lender losing out overall through the deal. This is expected to run until October 2016.

The interest rates on these loans are very competitive compared with the kinds of deals that would be available to someone with a 5% deposit. Although, clearly they cannot compete with deals you can get if you save a bigger deposit.

They are a useful alternative to the commercial market, but it's important to bear in mind that they're not the soft option: the rules the lenders have in place to ensure you can afford to borrow the money are every bit as tough as they are for any other mortgage.

The hurdles
There are some limits on the scheme. Not only is the equity loan part of the deal only available for new-builds, but there's a limit on the properties you can buy with either scheme. They cannot be used for holiday homes, investment properties, or for homes worth more than £600,000. Since the scheme was launched, George Osborne has also limited loans to four and a half times salary.

You have to pass the same affordability tests as you would with any other mortgage, proving you can afford to repay the debt - even after interest rates go up.

And different lenders have brought in their own restrictions. Lloyds Banking Group has announced that homeowners using the scheme will only be able to borrow up to £150,000 from them - when previously they could borrow up to £500,000. This is particularly significant when you consider that the group has 50% of the mortgage market. Nationwide, meanwhile, has limited the scheme to first-time-buyers only.

If the schemes appeal, you'll need to apply through an official Help to Buy agent or a mortgage broker. You can find the relevant agent on the government's Help to Buy website.

The number of the loans being given out is starting to slow, as the heat dissipates from the market. However, there's still plenty of opportunity to take advantage if you have a 5% deposit and keep finding the market rising too fast for you to amass 10%.

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