A government-backed scheme to help people take their first steps on the property ladder has finally been launched this month.
Help To Buy is designed to encourage banks and building societies to offer more mortgages for buyers who only have small deposits.
This will be typically those currently in rented accommodation.
Following the financial crisis in 2008, Britain’s banks introduced much stricter criteria on all forms of lending, including home loans.
This meant that very few mortgages were offered to people who could only afford deposits worth 5 or 10 per cent of the house or flat they wanted to buy.
Help To Buy provides lenders with a government guarantee on loans worth up to 95 per cent of a property’s value.
Because banks now face less risk on these high loan-to-value mortgages, they are expected to offer more of them and at lower rates.
This week, details of the first Help To Buy loans have been announced.
Halifax, which is part of the state-owned Lloyds Banking Group, is offering a two-year fixed-rate mortgage at 5.19 per cent interest a year.
This applies to borrowing up to 95 per cent, and comes with a £995 fee.
Natwest and its parent company Royal Bank of Scotland, in which the government also has a stake, also offer a two-year deal but at 4.99 per cent and with no fee.
The same banks’ five-year mortgage costs 5.49 per cent a year.
‘New options for borrowers’
David Hollingworth at broker London & Country says that these are attractive deals for those without much money saved up as a deposit.
"These deals will bring new options to market for those that have been struggling to meet the tougher deposit requirements and will help bring forward the point at which many can get on the ladder," he adds.
"Those feeling that saving for a bigger deposit whilst also paying rent is a thankless task may think that this is an ideal option for them to take the first leg up onto the ladder."
Other lenders, including HSBC, Barclays, Santander and Virgin Money, are expected to announce details of their own Help To Buy loans in due course.
Benefits of competition
Hollingworth says: "As time goes on the choice of Help to Buy rates will grow as more lenders sign up to participate.
"More competition should help the range of deal and rates on offer."
The impact of this increased competition is already clear.
Only two days after Halifax and Natwest announced their Help To Buy deals, Yorkshire and Clydesdale banks said they were cutting the rate on their first-time buyer three-year 95 per cent mortgage from 5.49 per cent to 4.99 per cent.
Hollingworth says: "There is no Help To Buy guarantee being used with this loan, but the overall result to the borrower is good."
If you are saving for a home, it can still be worth putting together as large a deposit as possible, however.
Still worth saving
Current mortgages for borrowers who can put down 10 per cent are significantly cheaper than the Help To Buy deals.
Skipton Building Society, for example, charges 3.99 per cent on a fee-free, two-year fixed loan.
The government’s involvement in the mortgage market doesn’t mean that every loan application will be automatically approved, however.
"One thing that won't change is that the borrower will be expected to tick all the boxes as far as their credit profile and affordability is concerned," Hollingworth adds.
"This certainly isn't going to result in lenders ripping up the rulebook as far as criteria goes – far from it."
The government guarantee is in fact the second stage of Help To Buy: the first was launched last April and gives assistance in buying new-build homes only.
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