Help to Buy Contractor Mortgage Guide

Update, September 2021

n.b.:

This page is for historical value only!

In 2021, Help to Buy changed beyond description, with only two government "Affordable Home Ownership" schemes now available for new applicants.

You can find info about the new schemes on our updated Help to Buy/Shared Ownership guide page. Thank you.

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It's clear from the phone calls we're getting that there's a great deal of confusion surrounding Help to Buy mortgages. Contractors and freelancers just don't seem to know whether they qualify. Let's sort it out, shall we?

First of all there are two types of Help-to-Buy schemes:

• Equity Loan;
• Mortgage Guarantee.

We've summarised their respective key points, below. We've even gone to the length of adding pretty pictures. Rest assured, this is as much for our benefit as it is yours.

What is important to note is that these are the rules as issued by HM Treasury. Individual lenders will decide if they want to adopt the schemes; if so, to what extent.

Help to Buy: Equity loan

The "Equity Loan" scheme will help borrowers buy their main residence with as little as 5% deposit. It will also help keep repayments to a minimum for the first five years.

The 'Equity' bit derives from the government funding the next 20% of the purchase price. To help drive take-up of the scheme, the Equity Loan is interest free for the first five years.

The client will need to arrange the balance, 75%, in the form of a mortgage from a High Street lender.

Now, not all lenders accept shared equity. Before you go trotting off to your nearest branch, please read our additional commentary, below.

You may think all this is benevolent of HM Government. In a way, it is. But they're not known for their outward generosity. This is a case in point.

When a Help-to-Buy mortgagee sells their home, they must pay back a reciprocal percentage of the selling price. Now, this isn't as 'like-for-like' as it first sounds.

If you took out an Equity Loan of 20% of the purchase price, you have to repay 20% of the sale price. Assuming that the value of your home rises in that time, the government stands to make a profit.

Equity loan: lending criteria

Here's a list of other Help to Buy "Equity Loan* criteria. As we say, these guidelines as per the government and lenders can choose how the implement them:

• the product launched in April 2013;
• it's only available on NEW BUILD properties;
• the maximum purchase price of a home is £600,000;
• the property must be the clients only property;
• it's available to First Time Buyers and Home Movers;
• the buyer needs at least a 5% deposit;
• the mortgage itself is only available on a capital repayment basis;
• it's NOT available for Buy to Let or second homes;
• it's available in England only;
  • different scheme rules apply in Scotland (see below).

Help to Buy (2): Mortgage Guarantee

Help-to-Buy 2 targets buyers who can afford an 80-95% LTV mortgage, but who can only access a 5% deposit.

Your affordability is subject to a lender's calculation. For contractors, choosing a lender who uses contract-based underwriting is a must to make the most of your income.

The buyer must fund the prerequisite 5% deposit themselves. Then, they need to secure a mortgage from a lender participating in the Help to Buy Mortgage Guarantee Scheme for the balance.

The "Guarantee" in this instance is to protect the lender in the event of the mortgagee being unable to keep up repayments. If they have to repossess the home, especially in the early years, the lender could face a loss.

The guarantee is not there to provide protection to borrowers.

The Treasury is offering participating lenders three different bands of guarantee:

1. 80-85%;
2. 85-90%;
3. 90-95%.

Each lender can select which band(s) they wish to offer. The interest rates and mortgage they offer you, they'll base on your affordability calculation.

Say, for example, they work out that you can afford an 85-90% LTV mortgage. You would still only have to stump up the 5% deposit and take out a 95% LTV mortgage.

However, the lender would then buy a guarantee from the government for up to the 85% they reckon you're good for. As you're putting down 5%, they're covering the 10% between 95% and 85%.

They are then protected for up to 15% of the purchase price, should you default on repayments to the extent of repossession.

The actual Guarantee isn't available until 2^nd January 2014, but clients can apply and complete before then.

Mortgage Guarantee: lending criteria

Here's the list of Help-to-Buy 2 "Mortgage Guarantee" criteria, under the same caveat as type Equity Loan:

• the product launched in October 2013;
  • but the guarantee will be available from 02/01/2014;
• it's available for New Build and existing homes;
  • the maximum purchase price of a home is £600,000;
• the property must be the client's only property;
• it's available to First Time Buyers and Home Movers;
• it's available on Remortgages, but only when switching to a new lender;
• the buyer needs at least 5% deposit;
• the mortgage is only available on a capital repayment basis;
• it's NOT available for Buy to Let or second homes;
• it's NOT available for Shared equity or Shared ownership;
• it IS available across the whole of the UK.

Which lenders offer help to Buy?

Currently, the following lenders are offering Help to Buy: Mortgage Guarantee mortgages:

• Halifax;
• Lloyds;
• Bank of Scotland;
• RBS;
• NatWest;
• Andermore;
• HSBC;
• Post Office Mortgages;
• Barclays;
• Santander;
• Virgin
• Ulster Bank

But please bear in mind only Halifax and Virgin Money offers contract-based income verification.

What does this mean?

It means that Halifax and Virgin Money will assess all contractors based on their contract rate. Others may insist upon at least two years' accounts, P60s, Tax returns and more.

In real terms, contractors in the first week of their first contract can get a 95% mortgage through Halifax. Through the others listed, it'll be difficult (if not impossible) to convince them they can afford a mortgage.

Help to Buy: Equity Loan, Scotland

The Scottish version is not dissimilar to the scheme available in England. But there are two key differences:

1. it's only available on NEW BUILD properties from specified developers;
2. the highest value home that qualifies is £400,000.

n.b. there are several Help to Buy websites for Scotland, but we've found some of them are inaccurate. We'd recommend either this link to HM Treasury or this one to The Scottish Government's Help-to-Buy advice.