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How the government plans to help you buy a house

One of the most significant announcements in last month's Budget involved plans for the government to help people purchase property.

George Osborne said that the Help to Buy scheme would be for people who wanted to buy their first home or move but only had a small deposit.

Following the credit crunch, banks have become much more reluctant to offer mortgages to buyers with deposits of less than 20 per cent, given the increased risk they represent.

So the government has decided to step in.

How will the new scheme work?

Help to Buy comes in two parts. The first, which started this month, should make it easier for people buy new-build homes.

The second, details of which are still being worked out, will provide guarantees to lenders who offer loans to those with deposits as small as 5 per cent of their property's value.

This will not be restricted to new-build homes, and is due to come into effect next January.

New-build assistance

Under the new-build element, buyers will put down a 5 per cent deposit, and take out a government-backed, low-interest loan for a further 20 per cent.

The balance of 75 per cent will take the form of a normal bank or building society mortgage.

This is essentially an expanded version of the current FirstBuy scheme.

FirstBuy is only available to first-time buyers with moderate incomes, whereas anyone can take advantage of Help to Buy.

The loan part is interest-free for the first five years, after which interest rises annually. It can be repaid at any time, or when the home is sold.

Mortgage guarantee

The government is also planning to offer lenders a guarantee when they give mortgages to customers with small deposits.

At the moment, these higher-risk buyers are either turned down for finance or face much higher interest rates.

But if banks were reassured that the government would step in if the homeowner could no longer make repayments, they would be able to lend more freely.

The coalition has earmarked £12 billion to pay for these guarantees, which should deliver £130 billion of loans. Properties can be worth up to £600,000.

Will the new schemes really make a difference?

There have been a number of government schemes introduced over recent years aimed at propping up the housing market and helping first-time and low-income homebuyers.

But their impact has been fairly insubstantial.

David Hollingworth from mortgage broker London & Country says: "Many of the schemes have been helpful for a certain niche of borrower, and it has definitely been better to have them than not.

"However some of the schemes like FirstBuy have tended only to really help the market around the edges."

‘A shot in the arm’

But Hollingworth believes that Osborne’s plans could go much further.

"The proposed extension of equity loans beyond first-time buyers will help more homebuyers.

"However the mortgage guarantee is likely to be more significant and could stimulate more lending at high loan-to-value and at better interest rates."

He adds that mortgages for those with low deposits are in desperate short supply at the moment.

"So even an increase in product availability would be a start. But improved interest rates in the open market could prove to be a real shot in the arm."

What are the risks?

For borrowers, the risks of signing up for either part of the scheme should be no greater than taking out a standard mortgage, as it is the government that will be stepping in to provide cheap loans and guarantees.

But this does mean the taxpayer will be exposed to potential problems in the property market.

Another issue is whether encouraging house buying will lead to higher property prices.

If banks start to lend more freely but there is no great increase in the number of new homes built, this will simply push up the price of the UK’s existing housing stock.

However, the coalition hopes that a more buoyant property market will encourage homebuilders to increase their activity.

There has also been speculation that the government’s guarantee could be used to fund second-home purchases as well as remortgages for people who don’t actually move house.

But ministers say they are still fine-tuning the scheme.

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Chris Torney

Chris Torney

Chris is the former personal finance editor at the Daily Express. He's been a journalist for more than 10 years and contributes to a wide range of finance and business titles.Read more from Chris

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