The Budget 2013: Mortgages
Article published on 9th April 2013
The Budget 2013 ?Help to Buy? and ?Mortgage Guarantee?: What it means to first-time buyers and those looking to climb the property ladder.
So George Osbourne revealed the Budget for 2013 to both cheers of joy and mumbles of frustration. It seems as if every group in society has been promised a perk and a downfall in his strategies.
This article focuses upon the Help to Buy and Mortgage Guarantee schemes that have been developed to help the UK's property industry. It will also bring to light the importance of having Insurance in place to protect people with mortgages, even when done through these two new schemes.
First let us quickly cover the two new schemes that Mr Osbourne has revealed.
Help to Buy Scheme
First-time buyers have been given an enormous helping hand towards getting onto the property ladder. An equity loan of up to 20% will be made available to those who qualify for the scheme, with no interest being added in the first five years. In effect this will mean that buyers with a 5% deposit will only need to take a 75% mortgage on a property, reducing the Loan-to-Value ratio which leads to improved interest rates.
This scheme will run for three years as of April 2013 and is available to anyone purchasing a new build home.
The stipulations of the scheme are:
- That the property being purchased is a new build.
- That the buyers have a 5% deposit to put down on the property.
- The property must be valued at £600,000 or under.
- The scheme must be accessed through government approved agencies.
Existing home owners who are looking to move up the property ladder are also included within the Help to Buy strategy, should they choose to move to a new build property.
Whilst this may all seem like a fantastic opportunity to get onto the property market, and it is, buyers should be wary of the interest rates on the equity loan after the first five years. After the initial five years the loan will be subject to a 1.75% annual fee, which will rise annually in line with the Retail Price Index and a further 1%.
In addition to this the 20% equity loan is based upon the value of the property that it relates to and the repayment of the loan is directly linked to any changes in the value of the property. For example, if the value of your property doubled, so would the loan.
The Mortgage Guarantee Scheme
The Mortgage Guarantee scheme contains provisions to provide security to mortgage lenders should they give borrowers a mortgage of between 80-95% of the property value. As of January 2014 the Mortgage Guarantee for lenders will be available for three years.
This will essentially provide mortgage lenders with some financial security/payback should a borrower default on the mortgage repayments and the house need to be repossessed. The borrower would forfeit their deposit and the government would reimburse the mortgage lender approximately 15% of the outstanding balance.
The advantage of this second scheme is that it can be used for new builds or existing properties. The Mortgage Guarantee scheme cannot be used for Buy-to-Let properties, but parents may be able to use the scheme to underwrite properties for their children.
So what does this mean?
By easing the risks of lending to mortgage providers and lowering the deposits required for a house purchase, the new Budget strategy has real potential to improve the stagnation of the UK property market.
Like the idea of these schemes?
We agree, they do sound promising. However we would suggest that if you are looking at using either of these schemes to purchase a property, that you consider the finances that you will need to cover the mortgage loan and the equity loan with the full interest rates applied. It would be heartbreaking to use this scheme and live in your home for five years to discover that after the interest free period, you cannot actually afford the full repayments.
We advise that you make sure that your budget is based upon the ?worst case scenario? so that you look at homes that are affordable to you in five years. The last thing that you want to do is get yourself settled into your home, only to discover that you cannot afford it in the long run.
Do I need Insurance?
No matter if you choose to take out a mortgage through one of these new schemes or if you have an existing mortgage, it is always a good idea to have an insurance policy in place to help protect your mortgage.
Here are some of the Insurance products available to protect your mortgage:
- Life Insurance
- Critical Illness Insurance
- Income Protection Insurance
- Accident, Sickness and Unemployment Insurance
To go in to great detail on these products is out of the scope of this article but below you will find a quick overview of each product and a link to a more detailed explanation.
In short a Life Insurance policy pays out a tax free lump sum to the benefactors upon the death of the person insured.
This is great for protecting your mortgage. The person insured takes out a Life Insurance policy to cover the amount of the mortgage. In the unfortunate case of the insured passing away their loved ones are not left with a mortgage to pay off. This is especially important if they are the main income earners of the family.
If you would like more information on Life Insurance please have a look here.
Critical Illness Insurance
Critical Illness Insurance works similarly to Life Insurance. The person insured can cover themselves for the value of the mortgage and should they be diagnosed with a Critical Illness covered by the policy, they will receive a tax free lump sum payout.
The Critical Illnesses that are covered within these policies are different between different Insurers, but most will cover you for serious heart attacks, strokes and some forms of cancer. The severity of your condition and specific diagnosis will affect whether you are eligible for a full or partial payout of your insurance policy.
It is worth noting here that you can get a combined Life and Critical Illness Insurance policy, which will cover you for both situations. This is far cheaper than buying the two policies separately. In fact, there is often a negligible difference to adding Life Insurance to a Critical Illness policy, and you will most likely be recommended to add this on for a minimal charge.
If you would like more information on Critical Illness Insurance please have a look here.
Income Protection Insurance
This type of Insurance policy works differently then the previously mentioned ones. Income Protection Insurance pays out a monthly tax free sum to the person insured upon a claim.
This product pays out when the insured is unable to work due to a long term illness or disability. This would allow you to still pay your mortgage repayments each month if you were to find yourself unable to work due to either a long term illness or disability.
Income Protection Insurance will pay out till you are able to return to work or you reach the specified retirement age. Income Protection Insurance is not recommended for mortgage cover over Life and/or Critical Illness insurance, as you will still accrue interest on the mortgage repayments rather than settling the debt in a one-off payment.
If you would like more information on Income Protection Insurance please have a look here.
Accident, Sickness and Unemployment Insurance
Accident, Sickness and Unemployment Insurance (ASU) is more of a short term policy then the others mentioned.
It works by paying the insured a tax free monthly sum upon a claim, typically for a maximum of 12 months. This will allow the person insured to keep paying the mortgage repayments if they find themselves out of work due to an accident, short term illness or redundancy. As with Income Protection Insurance this type of policy is not recommended for mortgage protection due to the risk of interest accrual and the uncertainty of sources of funds following the 12 month benefit period.
If you would like more information on Accident, Sickness and Unemployment Insurance please have a look here.
We have covered quite a lot in this article but we hope it was helpful. The new schemes coming in to place could be helpful for people looking to get onto or move up the property ladder. It really is a good idea to consider Insurance when looking at a mortgage. It can provider great protection if the unfortunate were to happen.
If you would like any help or advise with one of the Insurance products mentioned then please feel free to contact one of our qualified advisors on freephone 0808 17 82 777 or if you would like to jump in and see how much the different products could cost you, head over to our instant quote engine.
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