The next stage of Help to Buy is here, but will it really help?

As first-timers get new government aid to purchase a home, Chiara Cavaglieri looks at the pros and cons

The second phase of Help to Buy has been brought forward in a controversial move by the Government, designed to mobilise pent-up demand for housing. We were going to have to wait until next year for this stage, but homebuyers will now be able to apply for a mortgage from this week.

Part one of Help to Buy has been in place since April, providing loans of 20 per cent of the cost of new-build properties worth up to £600,000. This has enabled first-time buyers (FTBs) and home-movers to purchase with a 5 per cent deposit and a 75 per cent mortgage. The loans are interest-free for the first five years, after which buyers pay 1.75 per cent on the loan, increasing annually by the retail prices index (RPI) plus 1 per cent. A similar scheme has now been launched in Scotland, with the Scottish government contributing up to 20 per cent of the purchase price for new builds worth up to £400,000.

The plan is for Help to Buy stage two to run for three years until January 2017 potentially supporting £130bn of high loan-to-value (LTV) mortgages. Again, homebuyers need to raise deposits of just 5 per cent, but this time they can buy existing homes as well as new builds worth up to £600,000 – buy-to-let landlords and anyone who already owns property are not eligible. The 95 per cent LTV mortgages will be backed by the Government for up to 15 per cent of the loan, meaning lenders will be able to claim compensation if the property is repossessed and they are unable to recover all of their money (although they will have to take a 5 per cent hit to discourage reckless lending).

The Government won't actually start offering the guarantees until January 2014, as originally planned, but lenders will be able to sell the mortgages from tomorrow, a full three months early.

It is worth noting that so far only three lenders have confirmed they are taking part in this second phase of the scheme; Royal Bank of Scotland, NatWest, and Halifax. More lenders are likely to follow in the coming months, but the scheme is voluntary and many may decide not to sign up. We also have to wait to see how competitive the mortgage rates for Help to Buy customers will be.

Despite some uncertainty, the scheme will fuel interest from people who would otherwise struggle to raise enough cash for a deposit and "mortgage prisoners" stuck with uncompetitive deals because they don't have enough equity to remortgage or move home.

"The surprise announcement that the launch will be brought forward to next week will certainly be interest aspiring home-movers grappling with the need to build a big deposit," says David Hollingworth of mortgage broker London & Country. "Until we see how the products shape up it is hard to be sure what the market impact could be. But it certainly targets the problem for many borrowers of building a big deposit".

The housing market has already seen substantial improvement in terms of the choice and rates available to buyers with a 10 per deposit to put down, however mortgage availability for those with only 5 per cent remains extremely limited. Rates are also higher as a consequence - for example, a borrower with 10 per cent could get a two-year fix from Skipton Building Society at 3.99 per cent with no fee, while at 95 per cent LTV Newcastle BS charges 5.95 per cent with a £195 fee for its two-year fix.

Supporters of Help to Buy point to transaction levels still well below pre-crisis levels and say the scheme will increase demand for larger properties as well as typical FTB homes in the new build market.

There are risks, however, particularly when you consider that interest rates only have one way to go. Anyone considering taking advantage of the Help to Buy scheme must ask themselves how they would cope if UK rates and mortgage payments rise – on a £150,000 mortgage at 4 per cent (over 25 years) a two percentage point jump would see monthly payments increase from £800 to £978.

Critics have also warned that if new buyers flood in property prices could rise too quickly, cutting future FTBs off and increasing the risk of another crash. House purchase lending has already reached its highest level since 2008 in August, and there were 56,000 more mortgages so far this year than in the equivalent period last year. To complicate matters, this recovery is still being driven predominantly by equity-rich buyers in London and the south-east, while many other regions lag behind.

Richard Sexton, director of e.surv chartered surveyors, says: "If it wants to reknit the heart and soul of the British housing market – and the economy in general – then the Government needs to do more to address the cost of living and think about the regions outside the M25. It also needs to create an economy which encourages more house building so house price inflation can be kept under control, otherwise the next wave of FTBs will have their dreams of owning a home dashed."

The Bank of England has said it will review the scheme annually and take action if it drastically increases house prices, including pulling the plug altogether, although if lenders and borrowers are uncertain about potential changes in terms and conditions over its three-year duration it may not be as popular as expected.

Ben Thompson of the Legal & General Mortgage Club thinks talk of a housing bubble is premature, with the latest Nationwide house price index showing growth in the north of England at only 0.2 per cent, while London saw a 10 per cent boost. However, he says the Government must not duck the issue of housing supply.

"If the UK had asupply and demand balance, many of these initiatives would not be needed," he says. "Being bold and more long-term in outlook would allow more people to buy at a younger age than 38, mean less dependence on parental help, with controlled house price growth and of course, with increased new construction, a boost to the economy".

Discover more property articles at Homes and Property
Sport
Alexis Sanchez has completed a £35m move to Arsenal, the club have confirmed
sportGunners complete £35m signing of Barcelona forward
Voices
Poor teachers should be fearful of not getting pay rises or losing their job if they fail to perform, Steve Fairclough, headteacher of Abbotsholme School, suggested
voicesChris Sloggett explains why it has become an impossible career path
Sport
world cup 2014
Sport
Ray Whelan was arrested earlier this week
PROMOTED VIDEO
Arts and Entertainment
In a minor key: Keira Knightley in the lightweight 'Begin Again'
film
Arts and Entertainment
Celebrated children’s author Allan Ahlberg, best known for Each Peach Pear Plum
books
News
peopleIndian actress known as the 'Grand Old Lady of Bollywood' was 102
News
Wayne’s estate faces a claim for alleged copyright breaches
newsJohn Wayne's heirs duke it out with university over use of the late film star's nickname
Life and Style
It beggars belief: the homeless and hungry are weary, tortured, ghosts of people – with bodies contorted by imperceptible pain
lifeRough sleepers exist in every city. Hear the stories of those whose luck has run out
News
Mick Jagger performing at Glastonbury
people
Life and Style
fashionJ Crew introduces triple zero size to meet the Asia market demand
Sport
Santi Cazorla, Mikel Arteta and Mathieu Flamini of Arsenal launch the new Puma Arsenal kits at the Puma Store on Carnaby Street
sportMassive deal worth £150m over the next five years
Arts and Entertainment
Welsh opera singer Katherine Jenkins
musicHolyrood MPs 'staggered' at lack of Scottish artists performing
Life and Style
beautyBelgian fan lands L'Oreal campaign after being spotted at World Cup
Arts and Entertainment
Currently there is nothing to prevent all-male or all-female couples from competing against mixed sex partners at any of the country’s ballroom dancing events
Potential ban on same-sex partners in ballroom dancing competitions amounts to 'illegal discrimination'
News
business
Property search
Property search
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Business Analyst Consultant (Financial Services)

£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...

Systems Administrator - Linux / Unix / Windows / TCP/IP / SAN

£60000 per annum: Harrington Starr: A leading provider in investment managemen...

AVS, JVS Openlink Endur Developer

£600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...

E-Commerce Developer

£45000 - £60000 per annum + competitive: Progressive Recruitment: Exciting opp...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice