How those low-deposit mortgages are working

After the blaze of initial publicity, we are now seeing the first real glimpses of how the UK-wide Help to Buy scheme is bedding in.

The scheme allows credit-worthy borrowers to buy a new-build or an older home with a five per cent deposit and a state-backed mortgage which removes some of the risk for the lender if the borrower defaults. The Government has just announced that this incentive encouraged more than 2,000 people to put in offers on homes in the first month of the initiative’s launch, totalling £365 million of new mortgage lending.

The reason for the scheme is mainly that deposit mortgages have been harder to come by since the financial downturn, but the new figures show around 75 families a day are taking up the scheme.

State-backed lenders Royal Bank of Scotland (RBS), NatWest, Halifax and Bank of Scotland started offering products under the new phase of Help to Buy last month and HSBC has also just unveiled two new deals it plans to offer under the scheme. From Monday (November 25), HSBC will offer borrowers with a five per cent deposit a two-year fixed-rate deal with a rate of 4.79 per cent and a five-year fixed-rate at 4.99 per cent. Both of the products have a £99 booking fee.

Aspiring home buyers may want to wait and see what else is in the pipeline though, as lenders representing around two-thirds of the mortgage market have committed to eventually come on board the scheme.

Competition is also really hotting up among mortgage lenders outside the Help to Buy scheme, as they realise they need to up their game to attract new business.

If you are looking for a five per cent deal, it’s worth considering all your options as there are signs that Help to Buy is creating a knock-on effect by encouraging lenders which are not part of the initiative to bring out new deals. According to financial information website Moneyfacts, the choice of low deposit mortgages is picking up and there were 81 more deals on the market for people with deposits of five per cent or 10 per cent at the start of November than a month earlier.

One major development has been that Yorkshire Building Society has just unleashed a wave of new five per cent deals onto the market which are not part of Help to Buy. These 36 new products are available through Yorkshire’s brands Barnsley, Chelsea and Norwich and Peterborough and the group’s intermediary-only lending arm Accord Mortgages.

So what do the experts think? Here is what consumer campaigners and housing market experts have to say about the Help to Buy mortgage guarantee scheme:

Martin Lewis, founder of MoneySavingExpert.com

Lewis says people must consider whether they can genuinely afford the repayments - and if this will still be the case when interest rates eventually go back up.

Lewis points out that the Government guarantee under the scheme is there to protect the lender, not the borrower. Under the scheme, while the borrower puts up five per cent of the value of the home, the Government covers the lender for a further 15 per cent, so the lender is effectively only taking on a risk as if the borrower had a 20 per cent deposit.

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