Help to buy loans are now on properties which have been pre-owned

Not just new build homes.

This means a massive choice of used properties is now opened up to help to buy customers.

Whether you are watching this as a potential borrower or a broker, this new Help to Buy loan is potentially a fabulous product which I expect will improve as the lender gains confidence.

It’s not the government backed “Help to Buy” scheme which is restricted to new build properties.

It’s an independent product which can be used to purchase previously owned property.

This means:

• This gives borrowers access to far more properties to buy – up to 95% of the purchase price (95% LTV).
• Many borrowers may qualify for this loan when they don’t qualify for a 95% LTV mortgage.
• Overall it may be cheaper to borrow with this help to buy loan rather than a 95% mortgage because of the blended rate.
• The loan repayments are interest only which can reduce the monthly cost further.

The information on this help to buy loan is not exhaustive and is correct at the date of this video.

How the second hand property help to buy loan works.

Borrowers only need a 5% deposit and can borrow a further 25% towards the purchase price by way of a secured loan. Therefore, they can take out a 70% LTV mortgage at a far lower rate instead of a 95% product which is normally at a far higher rate.

There are a number of potential benefits of the scheme:

More borrowers may qualify

Where a traditional first mortgage lender is limited on the amount they can lend because of the applicant’s income, borrowers may be able to borrow more with this new product – potentially up to 6 x their gross income. Most traditional mortgage lenders are capped at 4 to 4.5 x gross income when lending at a high LTV.

It could be cheaper

As the interest rates on a 70% LTV mortgage are generally far lower than a 95% mortgage. So despite the loan rate being higher, the overall rate can be lower.

The loan is on an interest only basis which helps to reduce the monthly repayments

However, this does mean that the balance on the loan is not reducing so there needs to be a strategy to repay it such as a re-mortgage or sale of a property, a pension or cash ISA pay-out at some point in the future.

Borrowers could buy second hand property you really want

This scheme is special because unlike the government scheme, you can buy used property. Also, because it could allow you to borrow more, it may be a property which wasn’t available with a conventional mortgage.

Borrowers could buy a property which has more profit and potential

With the government help to buy you have to buy new build – but, new build properties often go down in value before they go up as people pay a premium for new build. Because you can now access second hand property you are less likely to pay over the odds. The property also has more potential to increase in value, especially as you may be able to make significant improvements at little cost. Buy a “fixer upper”.

Remember – the loan is an equity share loan which means that the lender shares in any increase or decrease in the property value – there are some worked examples below.

Getting advice

Any help to buy loan should be looked at as a potential tool to help you meet your requirements. Therefore, your adviser will look at conventional mortgages and compare the options which a help to buy mortgage might give you, then advise you on which is suitable. It’s a complex job for an adviser to do as there are so many variables. However, that’s their problem not yours. You just need to make sure that any adviser has access to this product. At the time of publishing this is a new product, only a handful of specialist companies, like Promise Money, have access to the help to buy loan for second hand properties.

Rates and features

• The interest rates are fixed for the first five years on an interest only basis. The actual rate is dependent on the loan amount so speak to an advisor for the up to date rates.
• Early repayment charges – there are no early repayment charges but remember this is an equity share loan – see worked examples on our website.
• Overpayments can be made.

Criteria

Borrower type

• The property being purchased must be occupied by the owners as their residence
• Borrowers must pass the lenders affordability and credit checks
• Applicants must provide 3 years address history
• Foreign nationals must provide evidence of permanent right to reside. 
• Borrowers must contribute at least 5% of the property value as a deposit
• Minimum household income £25,000
• Employed and self employed accepted

Property type

• Property must be in England or Wales – some postcode restrictions may apply
• The property cannot be: A new build, B2L, RTBs, HMOs, ex-LA flats, flats above commercial or shared-ownership properties
• Minimum property value – £100,000
• Maximum property value – £1,000,000 – above £1 million can be considered on referral
• Freehold flats not accepted
• Leasehold property must have a minimum of 30 years unexpired at the end of the mortgage term

Credit history

As the lenders are lending to a high LTV, they are looking for borrowers with a pretty good credit history.

• You should have no unsatisfied CCJs greater than £250 and no CCJs arising in the past 12 months
• No unsatisfied defaults or no defaults arising in the last 12 months totalling in excess of £500
• No Bankruptcy or IVA in the last 6 years
• Not have taken Payday loans/used in the last 12 months

Age and term

• The maximum age at the end of the loan is 70
• The minimum age at the start is 24
• The maximum repayment term is 40 years

Deposits and purchase under value

• Gifted deposits are acceptable from close family members
• Overseas deposits are considered on referral
• Purchasing undervalue is acceptable where purchasing from a close relative, or a long term tenant buying from their landlord

Here’s some typical questions and examples

What are the requirements for the first charge mortgage? 

Your first charge mortgage must: 

• Have a loan-to-value ratio of 70% or higher 
• Be a repayment mortgage (the first charge mortgage cannot be an interest-only mortgage)  

The loan is interest-only, this means you will be paying interest every month. Your monthly payments do not pay off any of the loan itself, though, you can choose to pay all or part of it off at any time.

When you repay your equity loan in part or in full, the amount you pay is worked out as the balance you are seeking to repay plus a share of the increase or decrease in the value of the property 

Here’s some examples of how the lender shares in the change of value of the property? 

Assumptions in this example: 

• Value of a property at the start of the term: £200,000 
• Amount of the equity loan granted by lender: £30,000 (15% of the property value) 

If the value of the property increases by £10,000 during the term, the total amount to be repaid by you would  be the following:  

• The £30,000 borrowed in full 
• Plus £1,500, the share of the increase in the value of the property calculated as 15% of the £10,000  increase in the property’s value during the term 

If the value of the property decreases by £10,000 during the term, the total amount to be repaid by you  would be the following:  

• The £30,000 borrowed in full 
• Minus £1,500, the share of the decrease in the value of the property calculated as 15% of the £10,000  decrease in the property’s value during the term 

You can repay the loan whenever you want

Fortunately, there are no Early Repayment Charges (ERC’s) on the product.

You can pay it back at any point during the term of the loan based a valuation by a RICS qualified surveyor to determine the valuation for the equity share.

You can also pay back any portion of the original amount. The outstanding balance will be reduced by the proportion of the loan you pay off. For example, if you want to repay 20% of the total amount owed then you will pay the lender 20% of the amount lent to you, plus the corresponding share of the increase or decrease in the value of the property.

You retain 100% ownership of the property. It’s your property and therefore you are responsible for all the costs, including, but not limited to: 

• Your first charge mortgage payments 
• Any improvements or repairs necessary 
• Surveyors’ fees 
• Estate agent’s fees  
• Buildings insurance (you must have a satisfactory policy in place at all times) 
• Water, electricity, internet, gas, council tax, etc.

Find out more

There is more information on our website about this product at www.promisemoney.co.uk – look in the mortgage menu and in the guides. You will also find information there on the government help to buy scheme and alternative schemes to get on the property ladder such as right to buy and shared ownership.

However, it can be very hard to tell whether you would be able to get enough finance for you business. For more information talk to an adviser today who can help you move forward.

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