The April 2013 budget saw the Chancellor launch the largest initiative seen by the UK housing market since Thatcher's Right to Buy scheme three decades ago, via the flagship 'Help to Buy' scheme. The initiative was launched in two distinct phases, one aimed at new build property, and the second a few months later supported lenders in being able to offer lower deposits to borrowers.
Help To Buy Equity Loan
This initially involved the Government supplying up to a 20% deposit contribution to add to a 5% deposit from the borrower. This enables the borrower to put down a total deposit of up to 25%, in order to help them secure a cheaper rate on their mortgage, and to satisfy lender demands for more security in new build lending. The Government share of the deposit has to be repaid, but it is interest free for the first 5 years.
Phase 1 of the scheme is only available to participating builders and new homes sites, and most builders will tag the scheme to plots that they need to get sold quickly. It can potentially present a fantastic opportunity for first time buyer contractors looking to get onto the property ladder, and also those who are looking to buy their new home and have a limited cash deposit available. However, it is imperative that contractors who are looking to take advantage of the opportunity presented by the Help to Buy scheme undergo a suitable amount of preparation first.
Those looking for Help to Buy contractor mortgages to buy a new property will need to approach relevant Homebuy agents who administer the scheme to actually secure the Government equity loan. There are slight variations on how the scheme is administered locally, with most insisting on evidence of a mortgage agreement in principle prior to granting the equity loan.
Help To Buy Mortgage Guarantee
This was launched several months early in October 2013, in order to kick start the housing market by allowing first time buyers to purchase any property (not just new build) via a deposit as low as 5%. The second part of the initiative allowed lenders to offer these low deposits via a Government guarantee for any mortgage that fell into arrears. In effect, the lender would go to the Government and ask them to guarantee any shortfall in debt recovery from the borrower. Usually a lender would take out separate insurance for this sort of situation. Phase 2 of Help to Buy is available via participating lenders only, but one of the positives is that most large High Street banks choose to offer the option to borrowers. Contractor-friendly lenders like Halifax have options for those contractors looking to proceed with a 5% deposit.
Risks For Contractors
In many cases, new home builders offering properties under the Help to Buy scheme were denying potential buyers the right to independent mortgage advice, and trying to force them to use their own approved brokers. For most, they can reluctantly go down this route as the desire to purchase a dream home may be stronger than shopping around for a mortgage.
However, this route poses inherent risks for contractors. When a builder puts the contractor in front of their non-specialist broker, the broker may have doubts about the contractor's ability to borrow sufficient funds to proceed. This is largely because they will view the limited company contractor as 'self-employed', and the umbrella contractor as 'employed'. As a result of this, the contractor's affordability will be assessed via trading accounts or payslips, and a large portion of their income will be ignored. The misconception of a contractor’s true earning potential can largely increase the chances of an adverse lending decision, which is very frustrating and disheartening for the contractor.
To avoid this situation, it is important to manage expectations at the outset when the question of evidence of mortgage approval arises. If the contractor has an underwritten mortgage agreement in principle from a contractor friendly broker, more reassurance can be provided to those who decide who the property will be sold to. Appropriate comments regarding the 'right to independent advice' can avoid conflict, and ensure that a contractor remains in pole position to take advantage of the scheme and secure their new home.
Help To Buy London
To reflect the higher property prices in the capital, the Government introduced a Help To Buy Scheme exclusive to those buying in London. From 1st February 2016 the upper limit for the equity loan increased from 20% to 40%.
With Help to Buy London the buyer will need to contribute at least 5% of the property price as a deposit, the Government will then provide a loan for up to 40% of the price, and the other 55% will need to be covered with a mortgage. The borrower will not incur loan fees on the 40% for the first 5 years of owning.
Help To Buy ISAs
The new Help to Buy ISA allows first time buyers to save for a deposit with the government’s help. The scheme means that the government will contribute £50 (25%) for every £200 that is deposited in to the account. When the ISA is first opened, the saver will be able to save an additional £1000, equating to £1200 in the first month, and £300 added by the government. The maximum the government will contribute is £3000 in total.
The Help to Buy ISA is available through banks and building societies. Depending on the different rates, you will earn interest and benefit from a bonus at the end.
To find out more about Help To Buy Contractor Mortgages please contact us. Our experienced and specialist consultants will be happy to help.