April 4, 2012

WhatHouse.co.uk guide to the New Buy Guarantee scheme

The idea of the New Buy Guarantee scheme is to help you if you’re a first-time buyer or existing homeowner without a substantial deposit to put down on your new home. Many experts have welcomed the introduction of the scheme as a positive step to help homebuyers. Here is a guide to navigate the scheme and understand the potential pitfalls

Who will the scheme work for?

The New Buy Guarantee is designed to help you secure a reasonably priced mortgage if:

  • you only have a small deposit and 
  • you are buying a new-build property 

Since the ‘credit crunch’, many banks have required borrowers to put down a deposit of 10% or more and the better rates have needed a 20% deposit or more. This scheme allows you get an affordable mortgage with a deposit of just 5%. However, bear in mind that a 95% mortgage may leave you with a large debt and may result in negative equity if house prices fall further. High ‘loan-to-value’ mortgages increase your risk of negative equity, where your outstanding mortgage is more than the value of your property.

Who is eligible?

To be eligible for the New Buy guarantee, you must be buying a new-build property in England. For example, a large Victorian house converted into flats will not be eligible. In addition, the builders or developers must have signed up to the scheme. While the scheme is aimed primarily at you if you’re a first-time buyer, if you’re buying your second or third property you’re not excluded, provided you meet the other criteria, which are:

  • the property must be your main home (not a ‘buy-to-let’) 
  • you must be a British citizen or have indefinite leave to remain in Britain 
  • you must have saved your deposit without help from a public or local authority 
  • the property must be purchased for under £500,000 

What lenders and deals are available? 

Three lenders, Barclays, Nationwide and NatWest, have already launched NewBuy Guarantee deals. Other lenders including Halifax and Santander expected to follow suit. The rates being offered are competitive compared to the few other 95% deals that are available in the market and some are even better than mortgages available to buyers with a 10% deposit.
However, bear in mind that all products available to you under the scheme at present are fixed-rate deals. Fixed rates protect you against any interest rate increases which would see your mortgage repayments rise. The potential pitfalls However, the downside of a fixed rate is that the deals often come with early repayment penalties. This means that if your circumstances change and you want to pay off some or all of your mortgage early, you will face a penalty for doing so.
 There is also a danger that taking a two-year fixed-rate mortgage deal now, will mean that it expires just as rates are expected to increase.

What if I have a higher deposit? 

If you have a deposit of between 5% and 10% you can still qualify for a mortgage under the NewBuy Guarantee scheme. The advantages of a bigger deposit are that you’re less likely to experience negative equity and that your overall mortgage payments will be lower as you are paying interest on a smaller sum.

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