NewBuy - What you need to know before you go ahead
I want to buy a home but do not have a big enough deposit to get a mortgage
You may find that the NewBuy scheme will allow you to buy a home with a lower deposit than a lender would normally need. So you may be able to buy sooner than you thought, without having to save for a long time to build up the deposit (sometimes as much as 25%) that some lenders would otherwise expect.
If you have a deposit of between 5% and 10%, and meet the mortgage lender’s affordability requirements, you may be able to buy a newly built home under the scheme.
Do I qualify under the scheme?
If you can answer yes to all the following questions, and you can meet a mortgage provider’s lending conditions, you may be able to buy a property as long as you have saved between 5% and 10% deposit.
- Is the property you want to buy a new-build property in England, which is included in the scheme? If in doubt, speak to the builder or developer about whether they take part in the scheme, and which lenders they are linked to.
- Is the price of the property £500,000 or less?
- Is it a standard purchase (not shared equity or shared ownership)?
- Will the property be your main home (not a second home or a property you plan to rent out)?
- Are you a UK citizen, or have ‘indefinite leave to remain in the UK’?
- Have you saved the deposit without any help from a local authority or public authority?
How does the scheme work?
The scheme works by allowing lenders to lend to those with a lower deposit than they would normally need to get a mortgage as it reduces the risk to the lender.
Under the NewBuy scheme, house builders and the Government have committed to cover a limited amount of any future losses that lenders in the scheme could suffer. This happens if a lender has to repossess a property and sell it for less than the mortgage value.
This means that lenders are prepared to lend a higher percentage of the property’s value than they otherwise would.
Does the scheme protect me?
No. The scheme does not change or reduce your personal responsibility in any way.
The lender will still assess you to see if they think you will be able to afford the repayments from your income.
You are responsible for paying your mortgage under the NewBuy scheme in exactly the same way as any other mortgage holder.
And, if the lender has to repossess the property and sell it, you would be responsible for paying any shortfall between the amount you owe to the lender and the amount the lender sells the property for.
What should I consider when taking out a mortgage under the scheme?
Buying a property with a mortgage under the NewBuy scheme is likely to be more suitable for people who expect to stay in the property for a number of years rather than those who plan to move soon.
If you take out a mortgage on a newly-built property that represents a high percentage of the value of the property – between 90% to 95% in this case - there are some things you should consider. Some new-build properties include an extra premium on the sale price that can reduce as soon as someone moves into the property. This potential reduction in the value of the property is an important factor you should consider when buying a new home using a higher LTV loan. If house prices fall, you may not have enough money from selling the property to repay the mortgage.
If the amount you owe under your mortgage is greater than the value of your home, this is called ‘negative equity’ and could make it difficult to move or remortgage unless you can meet the shortfall from savings or other sources. However, this is a risk of high loan-to-value borrowing (where you borrow a large percentage of the value of the property), not of the NewBuy scheme itself.
You may be able to borrow more (in other words, get a further advance) if your lender agrees, but at this point the scheme would not apply to you, and that may mean the lender will not be prepared to lend.
You should get financial advice if you are in any doubt about whether a low-deposit mortgage is right for your circumstances.
Do I have to take out a 95% mortgage?
No. If you have between a 5% and 10% deposit, you could qualify for mortgages under the scheme. Your lender or mortgage broker can help you identify the available options so that you can decide which mortgage is best for you.
How much can I borrow?
The amount you can borrow will depend on your circumstances and on the lender’s requirements. You will need to check with your lender or broker to make sure you can afford the mortgage.
What happens if my circumstances change after I have taken out the mortgage?
As with all mortgages, you should talk to your lender if your circumstances change. If you fall into financial difficulties, you will not be treated differently by your lender if you have a mortgage on a property covered by this scheme.
What do I do if I want to know more?
Speak to a mortgage lender or broker who will tell you whether they have mortgage products available under the scheme. You can also discuss your financial circumstances with them and whether a mortgage under the scheme is right for you.
Your home may be repossessed if you do not keep up with your mortgage payments.
If your home is repossessed, you will be responsible for repaying any shortfall between the sale price of the property and the outstanding mortgage.