equity loans explained State money, interest-free for five years

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1 help TO buy Your guide to the latest government-backed scheme Produced by In association with equity loans explained State money, interest-free for five years easy access How to apply

2 INTROducTION The UK mortgage and housing markets have been subdued since 2008, with a lack of mortgages available preventing many from buying their own homes or moving up the housing ladder. One of the biggest obstacles to purchasing a property is managing to save up the required deposit or to build up sufficient equity in your existing property to qualify for the mortgage you need to buy the home you desire. Paula John, editor Realising this the government has launched a number of initiatives in recent years to help people to buy their own homes. The government s Help to Buy scheme is a two-part initiative aimed at helping borrowers and participating mortgage lenders get around these challenges. This guide explains what the Help to Buy scheme entails, how it works, who qualifies for it and how you go about accessing the initiative. We hope that you find it clear and informative. Paula John, editor contents 4 What is Help to Buy? The new government scheme explained 6 Easy guide A simple diagram to explain how both bits of the scheme work 8 Who will benefit? Borrowers who may benefit from the equity loan 10 How does the mortgage work? What happens when you use Help to Buy 12 The Help to Buy process A step by step guide to arranging your purchase 14 Mortgage indemnity cover How this second part of the scheme could boost mortgage availability introduction and contents all the information within this guide is produced by Your Mortgage. Please note that the views and information have not been endorsed, issued or approved by natwest. all Views expressed in this guide are not necessarily those of natwest. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 3

3 the scheme the scheme What is help TO buy? the latest government scheme explained Help to Buy is a government scheme aimed at helping more aspiring homebuyers purchase property. The scheme falls into two parts: an equity loan and a type of insurance for mortgage lenders to help them offer more mortgages to people with small deposits. The Help to Buy equity loan is only available to homebuyers in England money has been made available for Scotland, Wales and Northern Ireland to launch their own versions. The insurance part should impact lending throughout the UK. the equity loan Launched on 1st April 2013, a Help to Buy equity loan is a loan offered by the government to any homebuyer purchasing a new build property. The maximum government loan on offer is for 20% of the property s value. You need to save a deposit of a minimum of 5% of the property s value, the government provides a loan up to 20% and you then get a mortgage to cover the remaining value up to 75%. The loan is interest free for the first five years and the government takes a 20% share in your property (see page 10 for more details). The loan makes a big difference by allowing those with a relatively small deposit to access a larger mortgage than they would otherwise be offered. The scheme is open to first-time buyers and homemovers but not to buy-to-let investors or people buying holiday homes. You can earn any amount of money, and use the scheme to buy a property worth anything up to 600,000. checks and balances The Help to Buy scheme is run by Local HomeBuy agents appointed by the government to assess each application and make sure the buyer could not afford to buy a home without help but can afford the mortgage repayments using the Help to Buy scheme. So you can t just choose to use the scheme if your income and savings suggest you can afford to buy without it. considerations As with many government schemes Help to Buy has come in for criticisms including: it only applies to new-build property and not everyone wants this True. The equity loan part of Help to Buy is only example New-build property value: 200,000 5% deposit raised by you: 10,000 20% deposit lent by government: 40,000 75% mortgage provided by lender: 150,000 available on new-build developments from participating builders. The government s reasoning is that this scheme is also aiming to boost the wider economy by encouraging construction and thereby creating jobs in building and related services. it will push up property prices as builders will simply add on 20% to the prices they charge The government s guidelines for participating builders state clearly: To ensure properties are sold at market value, the selling price must match the main mortgage lender s independent valuation. Mortgage lenders will want to be very careful that they do not accept overvaluations of the properties concerned as that would negate the advantage to them of lending at lower LTV levels. But the risk of the scheme bumping up new-build prices remains. Buyers using Help to Buy could quickly find themselves in negative equity If the scheme does artificially inflate new-build prices then buyers could indeed find themselves owing more on their mortgage than the property is genuinely worth (ie what someone in the open market will pay for it). This could mean that they are stuck in the same property for many years while they wait for it to increase in value. it will allow buyers to get help to purchase second homes While the rules were initially unclear, the government has now stated that Help to Buy is only available to those who do not have an existing share in another property and are intending to use the home in question as their primary dwelling and not for investment purposes. HB 4 YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 5

4 infographic infographic help TO buy Easy guide Help to Buy will make the aspiration of home ownership a reality for more people across the country. The Government will support people who have at least 5% deposit to buy a home through a two-part scheme aimed at increasing the supply of low-deposit mortgages and new housing. Each part of the scheme will help you to purchase a home with a maximum value of 600,000. Why is this best for me? I m interested in a new build home, but want to make my mortgage repayments more affordable Buyer s 5% deposit 10k Example house value 200k Source: HM TREASURY 40k 150k Government s 20% loan 75% mortgage from commercial lender OPTION 1 Help to Buy: equity loan New build only You ll need a minimum 5% deposit to qualify This expands the existing First Buy scheme and is now available to all, not just first-time buyers The Government will lend you up to 20% of the value of your property through an equity loan, which can be repaid at any time or on the sale of your home So you will only need to secure up to a 75% mortgage from a bank or building society The expanded scheme is available from 1 April 2013 It will run for 3 years and provide 3.5 billion of additional investment Maximum home purchase of 600,000. OPTION 2 Available from January 2014 Help to Buy: mortgage guarantee New build and existing homes You ll need a deposit of as little as 5% for this scheme Available to existing homeowners as well as first-time buyers You ll need to secure a mortgage for your purchase. The Government guarantee will encourage lenders to offer better access to low-deposit mortgages Available from January 2014, this scheme will run for 3 years Maximum home purchase of 600, OPTION OPTION Why is this best for me? I only have a small deposit, but I can afford repayments on a 95% mortgage and I want a new build or older home, or I want to remortgage with a new lender to get a better deal Buyer s 5% deposit 10k Lender covered on next 30k by Government guarantee 190k 95% mortgage from commercial lender Example house value 200k Source: HM TREASURY 6 YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 7

5 examples examples Who will benefit from help TO buy? the Help to Buy equity loan could help thousands of people to buy their first home Experts have worked out that the equity loan scheme could benefit up to 75,000 new homebuyers between April 2013 and April 2016 provided that a sufficient number of new-build properties participating in the scheme are constructed. In order to qualify borrowers must meet the following requirements: You must be looking to buy your only, own home to live in Help to Buy is not available for buy-to-let investment or the purchase of second properties You can be a first-time buyer or moving home You can have any level of earnings (not restricted to 60,000 per household like the previous NewBuy scheme) however, your financial situation will be assessed to ensure that you are not simply choosing to put down a smaller deposit and/or take out a smaller mortgage than you could otherwise afford on your own You must buy a newly-built property on a participating development You must have a deposit of at least 5% of the property s value You must be able to afford the mortgage. HB example ONe example TwO Liz and Tim, 42, live with their four-year old twins in a Jo and Maria, both 33, are renting a one-bed flat while three-bedroomed house which they bought in 2007 for saving up a deposit for their own home. They have 400,000 with a 95% mortgage. a combined take-home pay of 36,000. They have With their growing family they would like to buy managed to save 8,000 over the past two years but a bigger house closer to good schools. However, their without help it would take them at least another three property has not increased in value at all since they years to get together the 20,000 deposit they would bought it so, without help, they don t have enough need to buy their own 100,000 flat. equity built up in their property to move up the ladder. They are ideal candidates for Help to Buy. They earn 90,000 between them but with the rising Using the scheme they can buy a house on a new costs of living and of childcare they are not in a position development for 150,000, using a 30,000 equity loan to save for a deposit. and their 8,000 deposit, bringing their plans forward Using the Help to Buy scheme they could upscale to by three years and potentially getting a much larger a four-bedroom house on a new development without property, making monthly mortgage repayments at a waiting for years for their property to increase in value similar level to their rent. or to save the deposit needed to buy a bigger place. 8 YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 9

6 Mortgages Mortgages how The mortgage and equity loan work the nuts and bolts of the finance With the Help to Buy scheme you save a minimum 5% deposit, an equity loan of up to 20% comes from the Homes and Communities Agency (HCA), and the remainder (usually 75% of the property s value and up to a maximum of 80%) is covered by a mortgage provided by one of the banks and building societies signed up to the scheme. You can arrange the mortgage via a mortgage broker or independent financial adviser, or you can visit a branch or call one of the participating lenders and speak to an adviser there. A range of mortgage types is offered by participating lenders including fixed rates where the rate you pay is set for a number of years, and tracker deals where the rate you pay goes up and down in line with the Bank of England Base Rate. The maximum purchase price for a Help to Buy property is 600,000 so the maximum mortgage loan available is 480,000. The mortgage lender will carry out the usual checks to ensure that you are a good credit risk and that you can afford the mortgage. How does the equity loan work? The equity loan from the government is interestfree for the first five years (not the mortgage!). You make two separate payments one to the mortgage lender and one to the government. The Local HomeBuy agent appointed by the government will deal with the documentation and arrange the loan side of things. After five years you pay the government 1.75% interest on the loan, rising every year by the level of Retail Price Inflation (RPI currently 3.3%*) plus 1%. Note that if you default on the payments on your equity loan, the government, which has a legal charge on your property, can pursue you for the money. You can pay back the loan at any time but you have to repay a minimum of 10% of the amount you owe at a time. As the government owns a stake in the equity of your property it shares in any increase in the value of your home or any decrease. If, for example, you have bought a property for 200,000 using a 40,000 equity loan the government owns a 20% stake in your home. If, say, you sell for 250,000 five years later, the government gets back 20% of the sale price = 50,000. What if the property loses value? If you sell your home and you haven t paid off the loan, you have to pay the government back its percentage stake. So if your property has fallen in value you have to repay the same proportion of the reduced value. Using the example above, if you bought for 200,000 with a 40,000 equity loan (20%) and sold, say, five years later for 150,000, you will owe the government 20% of 150,000 = 30,000. That is 10,000 less than you were loaned in the first place and the government takes the hit. HB *RPI correct as at June YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

7 Process Process The help TO buy Process the process of buying your home step ONe Visit the website where you will find the details of the Local HomeBuy agent in the area where you want to buy. At this point you can register your initial interest in the scheme and you can also download and fill in a Help to Buy application form. At the same time you need to speak directly to a participating lender or set up a meeting with a financial adviser who can assess your financial situation and find a mortgage for you. The Local HomeBuy agent can recommend an adviser if you do not have one in mind. At this point you need to make sure you have: the 5% deposit funds to pay a reservation fee to the builder money to pay the Stamp Duty, solicitors fee and any adviser fees. step TwO The Local HomeBuy agent will look at your application and your financial situation and assess whether you qualify for the scheme. If you do qualify they will tell you within four days via an Approval of Eligibility Letter. They will then give you a list of the properties in your area which are available. step TeN On completion day your mortgage lender provides its funds and the Local HomeBuy agency will make its funds available to the home builder. Once completion has taken place you legally own the property and can now move in! step NINe You are now legally obliged to complete the purchase by an agreed date. step eight The Local HomeBuy agent will issue an approval to your solicitor and the contracts are exchanged. How long does the process take? The length of time the entire process takes depends largely on how long it takes you to find the right home. Once you have found the property you want to buy, reserved it via the builder and both you and the builder have filled in your forms correctly and submitted them to your Local HomeBuy agent, they will try to assess your affordability within four days. They then issue an Authority to Proceed which is valid for three months. It typically takes around three months for a homebuyer to find a property and move in but the process is usually more straightforward and therefore quicker with new-build homes, as surveys tend to be simple. Typically most house builders will be seeking buyers to exchange contracts within one month of making a reservation. Also because the Local HomeBuy agent has already assessed the affordability it can be quicker for the mortgage lender to check and process your application. HB step seven Your solicitor will check that everything is in order and ask the Local HomeBuy agent for permission to exchange contracts. step ThRee step FOuR step FIVe step six Set up meetings with the sales team at the property developments you are interested in and once you have selected the home you want to buy, fill in a Property Information Form provided by the builder and send it to the Local HomeBuy agent. At this point you need to tell your mortgage broker or financial adviser to proceed with your mortgage application. You also need to appoint a solicitor or licensed conveyancer as you would to take care of the legal side on a normal mortgage, and provide their details to the Local HomeBuy agent. If everything is in order, the Local HomeBuy agent will issue an Authority to Proceed and will send a pack of information to you and your solicitor, including the legal documents that your solicitor will explain to you. You will agree to exchange contracts within a specific time frame set by the builder - usually between 21 and 28 days. 12 YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 13

8 insurance insurance help TO buy Mortgage Indemnity Guarantee Cover How the government insurance will work The second part of the government s Help to Buy scheme is completely different from the loan scheme. It aims to encourage mortgage lenders to offer more mortgages to people with smaller deposits by making it less risky for them to do so. This part of the scheme does not involve any active participation on the part of the borrower who should simply benefit from access to a larger number of mortgage deals. Background In the past there were hundreds of mortgages available at 90%, 95% and even 100% loan-tovalue (LTV), so if you had a 10%, 5% or even no deposit, there was plenty of choice available. To protect themselves against the risk of borrowers with these smaller deposits defaulting, ie. not making their mortgage payments, lenders traditionally took out insurance called mortgage indemnity cover. However, in the years leading up to the credit crunch, with most lenders offering higher LTV mortgages, such deals had increasingly become the norm and were considered a reasonable risk for lenders and so mortgage indemnity had started to be phased out of the market. The government has now proposed that it plays the role of the insurer and as of 1st January example taking the example of a 150,000 capital and repayment-type mortgage over 25 years: Monthly 5.25% = 932 Monthly 3.56% = 763 Monthly saving = 169 Annual saving = 2,028 Saving over 5 years = 10, plans to provide indemnity to lenders offering higher LTV loans, promising to compensate them for part of their losses if mortgage borrowers fail to make their mortgage repayments. This may allow lenders to offer higher rate LTV deals at lower mortgage rates. Note that the indemnity only compensates the mortgage lender if you default on your loan, and offers no help to the borrower. If you default on your mortgage you still owe the full outstanding balance. Why is the indemnity important? Mortgage indemnity could make a big difference if it allows borrowers access to more deals with smaller deposits. In recent years while a handful of lenders have continued to offer mortgages above 80% LTV, and even up to 90% LTV because such loans are deemed more risky by underwriters, these higher LTV mortgages have been charged at higher interest rates than homeloans under 75% LTV. A typical interest rate charged on a 95% mortgage is around 5.25% while the typical interest rate charged on a 75% mortgage is around 3.5%*. Increased competition among mortgage lenders in the higher LTV area may act to bring down the interest rates charged on these loans. HB *Rates correct at time of going to press 14 YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 15