Help to Buy: government scheme will throw up more work and new challenges

The Help to Buy mortgage guarantee scheme can assist someone to purchase a newly built or existing property anywhere in the UK with a deposit of as little as 5 per cent. The scheme will run until 31 December 2016 or earlier if the money runs out.

Mortgage lenders have the option to purchase a guarantee on mortgages where the borrower has a deposit of between 5 per cent and 20 per cent. Crucially, the borrowers will remain fully liable for their mortgage payments in the normal way. The borrower will apply for the mortgage in the same ways as before and have to meet all the same criteria required by the lender before a mortgage will be offered.

Also, in the usual way, conveyancers will be instructed by the lender to act on their behalf. As far as we are concerned, this will be an ordinary mortgage to be used for buying a property, which must be or will become the borrower’s only property and not a buy to let.

We will be required to do all those things we would normally do for a lender on a purchase of a property, including registration.

As far as the guarantee is concerned, this does not affect us as it is an arrangement between the lender and the government. This mortgage guarantee scheme is fairly straightforward then.

Matters become a bit more complicated when we move on to the equity loan schemes.

In these cases, the government can lend up to 20 per cent of the cost of a new-build home for a term of 25 years. This means that the buyer will only need a 5 per cent deposit and a 75 per cent mortgage. This scheme is open to all who wish to buy a new-build property worth up to £600,000. It is important to bear in mind that the property cannot be a buy to let and the buyer must not own any other property at the same time. Part exchange deals are not approved as part of the scheme.

Equity loan agreement

When acting for a buyer, among all the other papers, you will also have the equity loan agreement to explain to and arrange to be signed by the borrower(s). It is important to ensure that the buyer knows what they are signing up to and that the lender is also aware. Usually, it will be stipulated in the mortgage offer that the lender knows about
the scheme.

The equity loan agreement does not require any repayment within the first five years of its term. After that, a fee of 1.75 per cent per annum on the outstanding loan amount will be due and this fee will increase each year in accordance with
the retail prices index, plus 1
per cent.

In addition, the loan agreement will stipulate that the loan provider is entitled to a share in the future sale proceeds of the property equal to the percentage contribution made towards the purchase. So, a 20 per cent loan will require a repayment of 20 per cent of the sale price.

If property values have fallen below the original purchase price, the buyer will repay less to the loan provider. Provided that the borrower can show that the sale price is the market value and they have complied with all the other requirements of the loan, the borrower is not required to provide any shortfall.

This will not be the case in respect of the mortgage. Remember, the mortgage lender will have a first charge over the property and therefore take the bulk, if not all, of the proceeds of sale. Any shortfall will probably be pursued if both the mortgage lender and loan provider agree to the sale proceeding in the first place.

The equity loan will be secured as a second charge over the property.

It is important that we are vigilant and ensure that the loan has been applied for genuinely (a fraudulent application is liable to criminal proceedings) and that we fully advise the buyer of the implications of entering into the second loan. The buyer needs to make sure that they can still afford the property once the initial five-year honeymoon period is over and the fee payments begin. SJ

 

John Coulter is a solicitor at Hadaway & Hadaway

www.hadaway.co.uk