Can I use the new government first time buyer loan scheme if I have a poor credit rating?
25 March 2011
By James Falla (about the author)
In the Budget this week, the government launched a new loan scheme designed to help first time home buyers get a foot on the housing ladder. We review whether the scheme will help those people who have a poor credit rating.
The Firstbuy loan scheme as it is known was launched by the government in Wednesday’s budget. The scheme will help first time buyers purchase a new build home by reducing the amount of the deposit they have to put down on the property.
Instead of having to save for a deposit of ten percent or more, first time buyers earning less than £60,000 will only have to save a deposit worth 5% of their property's value.
The government and the house builder will then each put up 10% in the form of a secured loan giving a total deposit of 25%. This will then enable people to qualify for 75% loan-to-value mortgage.
The secured loan would be interest-free for the first five years, with interest charged at 1.75% in year six, and at inflation plus 1% thereafter.
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Will the scheme help you buy a home if you have poor credit rating?
If you are struggling to get a mortgage because you have a poor credit rating, then the new scheme may help you.
It is currently unclear what credit checks you will have to pass to qualify for the Firstbuy loan scheme. However if you qualify, you will then only require a mortgage for 75% of the value of the property you want to buy.
If your credit rating is poor, you are far more likely to secure a 75 percent loan to value mortgage than one where you have a much smaller deposit.
Having said that, it is important to be aware that any mortgage you are offered will normally be based on a significantly increased rate of interest. This is because your poor credit history suggests to the lender that you are a high credit risk.
Not all mortgage lenders will lend to people who are high risk and you should speak to a specialist mortgage broker who can advise you about which lenders may be willing to lend to you.
Improving your credit score
If you know that you have a poor credit rating, rather than applying for a mortgage together with the Firstbuy scheme immediately, it may be a better to concentrate on improving your credit score first.
To do this, you should concentrate on paying off or settling any unpaid debt that you have at the moment.
If you cannot afford to do this you should probably not be considering taking more debt in the form of a mortgage at this time as you might struggle to meet your mortgage payments. Rather, you need to consider a debt management solution such as a debt management plan or individual voluntary arrangement which will help you resolve your debts.
If you do not owe any money you may have to wait for any default notices or county court judgements (CCJs) to come off your credit file.
You might also be able to start to improve your credit rating slowly by taking a small overdraft or credit card facility from your own bank and making sure that the required payments are met each month.
Beware of the Firstbuy pitfalls
If you do qualify for the Firstbuy scheme and can secure a mortgage, you should still think very carefully before going ahead with your purchase.
Beware of stretching yourself too far. If you only have to put down a 5 percent deposit, it might be tempting to consider purchasing a more expensive property.
However, you should remember that house prices today are generally on a down turn. As such, the value of the property you buy may actually fall after you buy it. This could then mean that the small five percent of the property you actually own quickly disappears and in fact your property goes into negative equity.
In addition, remember that interest rates will almost certainly rise over the next eighteen months to two years. As such when your mortgage deal ends, you will almost certainly see your mortgage payments rise. Think about whether you will be able to afford this.
Firstbuy scheme should help
As long as it is treated with care, the Firstbuy scheme will be a help to many first time buyers.
In theory, if you have a poor credit rating the scheme should help you get on the housing ladder because you will only need to secure a mortgage for 75% of the value of the property.
This means reduced risk for the mortgage lender and an increased possibility that they will be willing to lend, even to those with a poor credit rating.
However, if the reason for your bad credit score is that you already have debt that you are unable to repay, it is not advisable to try and buy a new home before this is repaid or settled as you might subsequently struggle with your mortgage payments.
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