Help to buy may no longer be headline news but it is providing valuable support to people buying a new home, up to 31^st March 2016, or earlier if all the funding is taken up. In particular it can help first time buyers struggling with the challenge of finding enough savings to put down a respectable deposit. The scheme comes in two forms: equity loan and mortgage guarantee.

Equity Loan

The equity loan scheme aims to bridge the gap between a small deposit and a mortgage for a smaller percentage of the purchase price. This scheme is available to those looking to move as well as first time buyers, but can only be used when purchasing new-build property from a home-builder registered with the scheme. Under current rules buyers are forbidden from using this scheme in combination with part-exchange on any existing property. Of course, there is absolutely nothing to stop buyers from selling their property separately and using the proceeds to (help to) fund the necessary deposit.

Buyers must be able to put down a minimum of 5% of the sales price (maximum £600,000) and the equity loan scheme will provide a minimum of 10% and a maximum 20% of the purchase price. This means that buyers only have to find a mortgage for 75% to 85% of the price paid. No loan fees are charged for the first five years of the loan. Following this interest is charged on a scale which rises annually in line with any increase in the Retail Price Index (RPI) plus 1%. The loan must be repaid within 25 years or when the home is sold. At that point the borrower has to pay the same percentage of the proceeds of the sale as the initial loan was of the original purchase price. In other words, if the borrower takes out the maximum 20% equity loan, the borrower pays 20% of the total market value on any future sale.

Mortgage Guarantee

The mortgage-guarantee scheme is essentially a form of insurance available to lenders who provide mortgages for higher percentages of the value of the property. Unlike the equity loan scheme, the mortgage-guarantee scheme can be used to buy existing property (as opposed to just new-build property). Shared-ownership properties are, however, excluded from the scheme.

As with the equity loan scheme, the buyer needs a minimum deposit of 5%, but in the mortgage guarantee scheme the lender provides a mortgage for the remainder of the purchase price in the normal way. The lender can, however, purchase what is effectively an insurance policy from the government for up to 15% of the value of the property. This helps to reduce the risk of lending to buyers with smaller deposits.

The mortgage guarantee scheme is open to people who have owned property in the past. Borrowers must, however, have sold the property by the time they enter into the scheme, and must use a repayment mortgage, rather than an interest-only, offset or guarantor mortgage.

It All Means in Practice

For many people, a house is the single biggest purchase they will ever make in their lives. It is therefore crucial to look carefully at all the available options to ensure that you get the best possible deal. It can also be hugely valuable to get some advice from a financial adviser, who can not only answer any questions you have about the house-buying process but also help to make sure that your finances in general are in as good a shape as they can be before you start applying for a mortgage.

Buying a home is generally one of life’s most significant events, even for those who have been through the process before. This being so, getting the right mortgage can have a major impact on the family finance.

What Kinds of Mortgage Are Available?

With a repayment mortgage, the monthly payment covers both the capital sum borrowed and the interest due on it. At the end of the term, the mortgage is guaranteed to be paid off in full, providing all the payments have been made on time.

With an interest-only mortgage, the monthly payment is simply to cover the interest owed. At the end of the term the borrower needs to pay off the capital sum borrowed in full.

With an offset mortgage, the borrower essentially has access to a giant overdraft, which is available for a fixed term. The balance must be paid off by the end of the agreed term..

What Are the Main Benefits of an Offset Mortgage?

The benefit of offset mortgages is that the savings made by reducing the interest due on the capital sum borrowed will be greater than the interest earned on money held in a standard current account or instant-access savings account.

Interest income is liable to tax, and the amount of tax due (if any) will, of course, depend on an individual’s circumstances. For working-age adults however, there could be significant savings to be made by foregoing taxable interest income in favour of reduced interest charges.

Offset mortgages offer a higher degree of flexibility than either repayment or interest-only mortgages. Borrowers on regular incomes can calculate how much they need to set aside each month to have their mortgage paid off by the end of the agreed term and stick to that. Borrowers with more variable incomes can increase and decrease their payments in line with their earnings. Likewise borrowers can dip into their savings, if they find they need or want to. Hence overpayments can be made with confidence, since the money can be withdrawn if necessary rather than being locked away.

How Is Interest Calculated with Offset Mortgages?

In terms of interest, offset mortgages typically work in the same way as repayment and interest-only mortgages. They may be fixed-rate, which means that the interest rate is set for a specified period. They may also be tracker mortgages, in which the rate charged to borrowers goes up and down in tandem with changes in the interest rates set by the Bank of England.

Are There Any Disadvantages to Offset Mortgages?

Not so much a disadvantage, more as an observation, is that offset mortgages can be harder to find than either repayment or interest-only mortgages. Borrowers may therefore have to look a bit longer before finding one. Borrowers may also find it more challenging to move from one provider to the other in search of better deals (e.g. new fixed-rate deals). While it is quite possible that the availability of offset mortgages will increase as people become more aware of them, this cannot be guaranteed.

Likewise, some people may prefer the security and imposed discipline of repayment mortgages, even if they may not be the best deal from a strictly financial perspective. The flexibility of offset mortgages may lead to temptation or alternatively to individuals being overly worried about spending money which has been put into their mortgage fund. Getting some advice from a financial adviser can help to resolve these issues and give you the best chance of finding the right mortgage for you.

Anyone who’s watched Strictly Come Dancing will have had the opportunity to appreciate the importance of keeping all aspects of the performance in synch with each other. If it matters in a 90-second dance routine then it matters even more when looking at protecting your financial future. Whether you’re looking at savings, investing, insurance or any other financial product, your overall aim should be to improve your personal wealth and every decision you take should lead towards that goal. Of course, the Strictly celebrities don’t work on their own, they get help from experienced pros, so when looking at managing the family finance, it can help to get some financial advice from a financial adviser.

Make sure all financial products work effectively together

An example of two financial products which very much need to be kept in step with each other is that of mortgages and life insurance. The fundamental purpose of life insurance is to provide a financial cash cushion for those who are left behind after a death. In short it allows beneficiaries to focus on dealing with the emotional aspects of bereavement without facing the additional distress of financial difficulties. The prospect of a grieving partner having to sell the family home due to an inability to meet mortgage repayments is one that can feasibly be averted with forward planning.

Every time your circumstances change, make sure that your finances stay in synch with them

The key point is to ensure that your life insurance reflects the reality of your outstanding mortgage. Assuming you take out (or update) your life cover when you buy your first home then the level of cover will reflect the amount needed to take care of the mortgage in the event of a death at that point. If, however, you increase the size of your mortgage for any reason, then you need to ensure that your life insurance cover will still do its intended job. The most obvious reason for taking on a larger mortgage is, of course, moving house, but you could choose to increase the size of your mortgage for other reasons. For example you may want to extend your current property as an alternative to having to move.

Be prepared for life’s slings and arrows

As well as looking at the potential consequences of you or your partner dying, it’s also important to think about what would happen in the event of one or both of you being out of work for any length of time. This could be due to the employment market or alternatively due to serious illness or accident. Should any of them happen to either of you, then having the right insurance cover in place could make all the difference to your financial and emotional comfort. In short it could mean the difference between worrying about paying the bills and being able to concentrate on making a full recovery.

In short, insurance is about making sure that you and your loved ones are protected if the worst happens. It’s probably one of the few products people buy actively hoping that they’ll never need to use it. For many people, however, it is an essential part of their overall financial planning and needs to be kept up-to-date in line with their changing needs.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE