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How can you use Help to Buy?

There have been a number of new angles coming to light on the Help to Buy scheme over the past 24 hours.

In particular the Help to Buy guarantee scheme is generating a number of questions.

Remember the Help to Buy guarantee scheme is designed to make it more palatable for mortgage lenders to provide higher loan to value advances to borrowers with the Government under pinning some of the risk.

How to Help to Buy Guarantee would work for the lender

The idea is that a borrower makes a purchase with a guaranteed mortgage at loan to values over 80%.

If the borrower later defaults and the lender has to sell the property to recoup their mortgage principle, the lender has much more limited risk than would otherwise be the case.
For example if a property bought at £100,000 were sold for £85,000 the borrower would lose their £5,000 deposit. The remaining £10,000 loss would be 95% covered by the Government (£9,500) with the lender’s loss just £500.

Industry commentators are picking up on the capital adequacy requirements on mortgage lenders making higher loan to value loans. Currently lenders have to hold eight times more capital for loans above 90% loan to value than they do for 60% loan to value.

Without any relief on this requirement lenders may still find it difficult to issue higher loan to value mortgages. If that requirement is reduced lender can start advancing higher value loans with a smaller pool of capital to fall back to if things go wrong.

Also, many people are asking what happens if this initiative fuels a property price boom ? (which the Help to Buy equity scheme may well do in the new build market).

Property price booms, high loan to value mortgages, lower capitalisation in the banks – now where have we seen that before?

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