Help-to-buy has flattened many barriers to home-ownership for contractors with just 5% deposit. 95% loan-to-value mortgages are back with a vengeance, great news for the housing market. And for contractors from all sectors with unimpeachable credit.
In 2013 the government launched its Help to Buy Mortgage Guarantee scheme. This breaking news was a huge boom for the UK’s self-employed contract workforce.
Owning a home is once more a reality for the thousands of contractors who can’t stretch to a 10% deposit.
What is Help to Buy (and why is it big news?)
The credit crisis forced mortgage lenders to all but remove low deposit mortgages. The higher the loan to value, the more stringent the lending criteria became.
Lenders reserved the best interest rates for borrowers whom:
- had large deposits at their disposal, reducing the loan-to-value;
- enough equity in their existing homes for a decent remortgage rate.
Both the housing and construction industries have suffered as a consequence. The government had to act. In the short term, it needed to address the shortfall in GDP affected by these industries.
But it also has redress the balance of home-ownership. The prospect of a whole generation missing out on home-ownership was – and is – real.
Help-to-buy is the government’s answer. We can break the programme down into two main components. Both ask borrowers to put down 5% of the cost of the home, but address two different needs:
- Equity Loan – already launched, targeting new build homes;
- Mortgage Guarantee – for existing pre-built properties.
It’s the latter that’s got us excited. Now, contractors with 5% deposit needn’t wait for construction agencies to finish new-builds. Find a pre-built home on the market now and you can use Help-to-buy to buy it.
Help to Buy 1: Equity Loan
Part one of the initiative is the ‘Equity Loan’. The government launched it in early 2013 as a way to attract home buyers with just 5% deposit.
With the Equity Loan, borrowers can buy a new build home up to the value of £600,000. The difference between this and other mortgages is that the funds come from two sources.
The government forwards the first part of the ‘mortgage’. This comes in the shape of a 20% interest-free loan over a 5-year term. Savvy contractors would look to save the 20% and pay it off when it becomes due.
That’s because after those five years, borrowers will have to pay an annual fee of 1.75% of the Equity Loan. It’s not interest. It’s a fee on any of the loan amount you’ve not repaid, which increases year-on-year by RPI plus 1%.
Equity Loan: mortgage and deposit
The remaining 75% of the new build cost you borrow from a mortgage lender in the conventional manner.
But you must be careful as only a select number of lenders have signed up for Help-to-Buy to date. When you consider how few offer genuine contractor mortgages too, options become even fewer.
But that’s an aside topic to address if, as a contractor, you only have a 5% deposit but want to buy a home. For now, here’s the breakdown of Help-to-Buy Equity Loan mortgages in their three parts:
- 5% deposit: that comes from you as the amount you ‘put down’;
- 20% Equity Loan: the government provides this through the housing contractor;
- 75% mortgage: you arrange this yourself (or through a broker) with a lender in the programme.
Help-to-Buy 2: Mortgage Guarantee
The second part of the scheme we can expect to be far more popular and straightforward. The government has called it the Mortgage Guarantee and it’s a lot more like a normal mortgage.
In contrast to the Equity Loan, the Mortgage Guarantee isn’t restricted to new builds. The government launched the product to cover all properties, including remortgages.
Where does the ‘Guarantee’ come in?
Borrowers will see little difference between this and regular mortgages. They’ll just take out a 5% deposit mortgage with a lender who’s signed up for Help-to-Buy. Said lender will forward the other 95% of the cost of the home in the form of a mortgage.
It’s the mortgage lender whom the government is covering with the the “guarantee”. The government will cover up to 15% of the property value as an insurance policy.
This ‘policy’ covers the lender if the borrower defaults within the first seven years. If so, the government will compensate the lender through the indemnity guarantee.
The net effect will be the same as the Equity Loan, but for existing properties. Borrowers will be able to buy or remortgage properties valued up to £600,000 with just 5% deposit. But the 95% will come from just one source, the mortgage provider.
Who can apply for the Mortgage Guarantee scheme?
The scheme is also available to so-called “mortgage prisoners”. They’re homeowners who can’t move or remortgage due to a lack of equity in their existing home.
In some cases, especially if they bought at the housing peak, their homes are in negative equity. When you understand that, you can see why lenders want security for loaning 95% of a house’s value.
But extending the Mortgage Guarantee thus is great news for contractors. Many have been sat on their lender’s Standard Variable Rate (SVR) unsure of their next move. With lenders tightening their lending criteria, those with irregular income have suffered most.
The Help-to-Buy Mortgage Guarantee will help ease that pain for many contractors. If equity in their home has been a barrier, they can now move to a more competitive rate by switching lenders.
Buy-to-let landlords and people looking to buy a second home aren’t eligible for this initiative.
Will it be easy to apply for a mortgage through the scheme?
Ease of applying for Help to Buy mortgages for contractors will depend on two main aspects:
- their ability to afford the mortgage in the first instance;
- their credit history and how pristine it is (or isn’t).
The government has created the Mortgage Guarantee in part to balance the books. They want to increase the number of high loan-to-value mortgages going through banks.
But they have made one thing clear. Only borrowers who meet lenders’ strict income criteria can access mortgages through the scheme.
Lenders will decline borrowers if their credit history fails FCA “impaired credit” standards. This includes having a county court judgment over £500 in the past three years.
How do I access the Mortgage Guarantee scheme?
During the initial launch back in 2013, only three lenders signed up to Help-to-Buy. They were Halifax, Royal Bank of Scotland and NatWest. But many more lenders have followed since.
This is great news for contractors. The Halifax is now offering Help-to-Buy mortgages using contract-based income verification.
This cements Halifax’s position as the ground-breaking mortgage lender for contractors. Before this landmark, the bank relaxed their definition of contracting earlier in the year. They now welcome all contractors, not just those working in the IT industry.
Halifax, like other contractor-friendly lenders, work out mortgage affordability using contract rates. There’s no need to provide accounts, a P60, or tax returns. Their underwriters can see that such documentation is just superfluous.
If you’re interested in seeing how much you can borrow, we can help. Our mortgage calculator uses your day rate, just like contractor-friendly lenders. Using this method, even contractors in their first week can secure mortgage finance.
A select number of other contractor-friendly lenders have begun to, also. This means contractors can access Help-to-Buy using a multiple of their annualised contract income. Moreover, they have a choice of lenders on their side.
What interest rates are on offer?
At present, rates are around the 4% for a 95% loan-to-value mortgage using Help-to-Buy. That’s competitive compared to similar 95% mortgage deals currently available on the market.
When will the scheme end?
We expect the Mortgage Guarantee scheme to run until 2019. But the Bank of England will be keeping a close eye on it. They also have the power to put in place an emergency brake should signs of a bubble emerge.
What’s my next step?
Our award winning mortgage consultants are on hand to help you. They can take you through the application process and answer any questions you have.
We can manage the entire process from start to finish. 5% to put down today: that’s a fair achievement. We want to make your application for a 95% LTV mortgage painless and reward your endeavours thus far.
Call us now on 0208 421 7788 to discuss your immediate requirements. That’s essential if you’ve seen a home and you want to use Help-to-Buy to buy it.
Or you can complete our callback form. Then, one of our independent mortgage advisers will contact you at at a time better for you.