Through experience, we’ve found that a lot of would-be homeowners in the UK confuse the government’s Right to Buy scheme with severable separate affordable homeownership programmes.
‘Help to Buy’ in particular is often mistaken for the same basic scheme as ‘Right to Buy’, though there are significant differences between the two.
Help to buy
Introduced in 2013, the government’s Help to Buy programme was created to help struggling buyers purchase properties without the need to provide an excessive down payment. Whereas banks and major lenders typically request deposits of between 10% and 20%, Help to Buy reduces initial deposit requirements to just 5%.
The property being purchased must have a market value of less than £600,000 and be the intended primary residence of the buyer, should the purchase go ahead.
Qualifying applicants are required to offer a deposit of 5%, after which the government provides an equity loan up to a maximum of 20% (or 40% in London) of the market value of the property. This boosts the down payment the buyer is able to provide, opening the door to more competitive mortgage rates and lower borrowing costs with leading lenders.
Contrary to popular belief, these equity loans are available to first-time buyers and existing homeowners looking to relocate. However, the scheme covers new-build properties only, not resale homes of any kind.
The government-issued equity loan is provided for an initial five-year period at 0% interest, after which an interest rate of 1.75% is payable during the six-year period, increasing by 1% every year after the loan balance remains unpaid.
The Help to Buy scheme is therefore designed to improve accessibility and initial affordability for homebuyers, though it doesn’t offer any direct incentives regarding the price of the property. The market value of the property is the price payable, and the equity loan provided by the government must be repaid in full.
Right to buy
By contrast, the government’s ‘Right to Buy’ scheme opens the door to potentially huge discounts for qualifying tenants. In this instance, the scheme is available exclusively for tenants of council properties who must have lived in a council home for a minimum of three years (previously five years).
Tenants who qualify under the Right to Buy scheme may be offered as much as 70% off the market value of their property. The maximum discounts currently available are set at £70,600 across most of England and £104,900 in London. The size of the discount depends on several factors, including the value of the property, the type of property they live in, and how long the tenant has lived there.
While the Right to Buy scheme doesn’t offer any direct assistance regarding mortgage eligibility, qualifying applicants can use the discounts offered instead of down payments. This means that while it is still necessary to apply for a mortgage via the usual channels, it may not be necessary to come up with any deposit whatsoever.
The government recently announced plans to extend the right to buy to tenants of housing association properties, though no specific dates for the new legislation have yet been confirmed.
Ask the experts…
If you’re interested in taking advantage of any government-issued home purchase scheme, it’s important to carefully consider all available options. Independent advice and support should be sought at the earliest possible stage in order to ensure you fully understand your position and your eligibility, should you go ahead.
For more information on any aspect of Right to Buy or Help to Buy, book your obligation-free consultation with a member of our team today. Work out the costs of a mortgage using our UK mortgage calculator.