If you are interested in knowing more about how the Help to Buy scheme works and are considering applying, there is some basic information you should know in order to get started. First of all, find out which house builders/developers are offering the scheme. If you are successful in your application, you can pay off the 20 per cent equity loan of the current value of your home at any time. If you still own the house after five years, you will start paying an annual fee of 1.75 per cent of the value of the equity loan. There is no interest to pay on the loan.
The fee does not pay off the equity loan and when you sell, you will still be liable to pay 20 per cent of the proceeds to the government. So when you sell, you have to pay 20 per cent of the sale proceeds to the government.
So an example would be that you see a property for £200,000. You will have to find a 5 per cent deposit (£10,000). You take out a 75 per cent mortgage (£150,000) from a commercial mortgage lender. The remaining 20 per cent comes in the form of a £40,000 equity loan from the government.
The mortgage guarantee scheme works like a normal mortgage. But if you default on your loan and the property is sold at a loss, the government guarantees to cover the lender up to 15 per cent of the losses. This is to encourage banks to lend as it covers them, not you as the buyer. In return for the guarantee, lenders pay a fee. Mortgages can be taken out on new or old properties, up to 95 per cent loan to value. There is o time limit by which they must be paid off.