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Help to Buy consists of two main policies designed to help borrowers with deposits of just 5 per cent get on the property ladder. The first part of the scheme was launched in April 2013 and offered loans of up to 20 per cent to all homebuyers purchasing a new-build property up the value of £600,000.
The loan was offered interest free for the first five years after which buyers would be charged an annual fee of 1.75 per cent of the loan, rising annually by retail price inflation (RPI) plus 1 per cent. Borrowers would be entitled to repay the loan at any time without penalty.
The second part of the scheme – the mortgage guarantee – would allow buyers of any property (not just new builds) valued at less than £600,000 to borrow with a deposit of just 5 per cent of the property's price. The government would guarantee up to 15 per cent of the loan as an insurance policy for the banks.
The mortgage guarantee scheme was available to all borrowers, not just first time buyers, purchasing a property valued up to £600,000. However, buy-to-let landlords, those looking for a second home, or foreigners with no UK credit history would be excluded from the scheme. Strict income tests and credit history tests would also be applied.
In October 2013, only two lenders, Lloyds Banking Group and Royal Bank of Scotland, had confirmed they were taking part in the scheme from the outset. HSBC was due to join the scheme later in 2013 and Virgin Money and Aldermore, a small lender, were planning to launch products in 2014.
Critics of Help to Buy said it would inflate house prices making house prices even more unaffordable. In addition, they said the scheme failed to deal with the root cause of the problem which was a lack of housebuilding.
The chancellor George Osborne said the scheme would be in place for three years but said the Bank of England would have powers to put the brakes on should there be signs of a bubble emerging in the property market.
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In October 2013, the UK government defended its flagship Help to Buy housing policy and said there were no signs of a boom in the UK property market if one looked beyond London and southeast England.
In November 2013, it was announced that banks would cease to receive funding for mortgages and personal loans from 2014. The moves came after concerns expressed about a housing boom in the UK, however Bank of England governor Mark Carney said it was still early days regarding making a decision on Help to Buy.