Warners Property Jargon Buster: What Does ‘Help to Buy’ Offer You?

Buying and selling a property can be a stressful process, especially if it’s something that you haven’t done before. Adding to the stress is the fact that the property industry involves terminology, processes and schemes which most people won't be familiar with.

To help with this, Warners is pulling together a series of ‘jargon busting’ articles to answer the questions we are often asked by buyers and sellers and explain, in plain English, some of the key things that you may come across when buying or selling a home.

For our latest theme, we look at something that most first-time buyers will want to research before they start house-hunting - ‘Help to Buy’.

Help to Buy - A Brief History

Edinburgh is widely acknowledged as one of the most competitive housing markets in the UK with most sellers in a strong bargaining position resulting in steadily rising house prices.

While this is great news for sellers, for prospective buyers – especially first time buyers – the picture is less favourable. Many people looking to get onto the property ladder have to take stock and carefully consider their options, not least how they can save the deposit required to secure a mortgage.

The Government has recognised this and introduced ‘Help to Buy’ schemes to ease the pressure on those looking to take their first step onto the property ladder.

‘Help to Buy’ schemes are popular for good reason. They can allow people to get onto the property ladder sooner than would otherwise have been possible, while also allowing them to have more money available to spend on their new property once they move in.

Given that house prices in the capital are projected to increase by up to a quarter in the coming years, such schemes are only likely to increase in popularity.

What Help to Buy Schemes are Available

Two main avenues exist for those interested in ‘Help to Buy’ ownership.

• Equity Loans
• Help to Buy ISAs

There are separate equity loan schemes available for new-build properties and for existing properties bought on the open market.

For new-build properties, equity loans of up to 15% are available to buyers. This leaves owners with a minimum of 85% to pay on their property.

One of the key perks of this scheme is that buyers can secure a mortgage with a deposit of just 5%, a far more manageable sum than the 10% to 20% many banks will ask for. Having a higher deposit also allows you access to better mortgage rates.

Once you have bought your home you will then be able to “tranche up”, buying up chunks from the Government’s share to eventually gain full ownership.

However, there are some potential issues to consider.

Most first-time buyers will not be put off by the fact that their ability to let or sub-let their new home is limited. If you do wish to do this, you will need to get prior written consent from the Government to do so.

Of more importance is that when you come to sell, you will need to advise the administering agent. In Edinburgh and the Lothians, this is typically Link Housing. There will be certain conditions that you need to adhere to in terms of how the property is marketed, the offers that you can accept, and the way in which sale proceeds are divided up.

In addition, you will need to gain approval before making improvements to your property, to protect the affordable status of the home.

Finally, though the loan is interest free, the Government will own 15% of your property. This means that any fluctuations in your home's value will be reflected in the value of the Government's share. If you receive a contribution of £10,000 towards the property that you are purchasing and the value of the property rises by 20%, the value of the Government's equity stake also rises by 20%.

The equity loans available for properties that are bought on the open market work in a broadly similar fashion, but there are some key differences. Buyers must take an equity stake of between 60 and 90%. Applications to the scheme are also made to social landlords who then administer the scheme on behalf of the Scottish Government.

There are also thresholds for how much you can pay for a property based on its size and location. You can find out more information on these here.

‘Help to Buy’ ISAs offer a different kind of financial assistance and less of a commitment.

These savings accounts firstly offer a reasonably high rate of interest so make a safe bet for those looking to make savings towards a property without too much of a commitment. Savers will then be able to deposit £200 a month towards a deposit on a home of any value.

When it comes time to buy, the government will then add 25% to the buyer’s savings up to £12,000. That’s a handy boost of up to £3,000. Unfortunately, this top-up value cannot be used towards a deposit (the initial savings must be) but will offer a welcome respite once you’ve completed the deal easing the burden on your mortgage payments.

The drawbacks on these ISAs are also less pronounced.

Should you change your mind after saving and spend on something other than a home deposit then you forfeit the 25% offered by the government.

While this may sound steep initially, the same does not apply to any other interest – essentially meaning the account converts from a ‘Help to Buy’ ISA to a simpler savings account.

Next Steps

Although schemes like Help to Buy can be massively beneficial for many buyers, it is important not to enter into anything like this without doing all of the necessary research. Buying a property is a huge financial commitment and, though we do our best, explaining all of the details of the available schemes sadly isn't possible within a single article!

If you think the time is right for you to get onto the property ladder, then it's well worth looking into the Help to Buy schemes as early as possible. Even if you decide that they aren't for you, at least you can then make a more informed decision based on all of the relevant facts.

If you have any questions about ‘Help to Buy’ schemes or any other aspect of buying a property, please contact us on 0131 667 0232 or email property@warnersllp.com