What are the Pros and Cons of the Help to Buy Scheme?
The Help to Buy equity loan scheme has helped over 355,000 home buyers on to the property ladder since it was introduced. It’s designed to help first-time buyers with a smaller deposit improve their chances of securing a mortgage, but there can be drawbacks of buying a home this way too.
What is the Help to Buy scheme?
Help to Buy is a government scheme designed to help first-time buyers in England buy their first home. The Help to Buy equity loan scheme, to give it its full name, is only available on new-build homes from developers registered with the scheme. There are also regional price limits on the homes that can be bought under the scheme. The final date for applying for a Help to Buy equity loan is 31 October 2022 as the scheme is due to end on 31 March 2023.
A version of the Help to Buy loan scheme is available in Wales with slightly different rules, but there is currently no equivalent if you want to buy a home in Scotland or Northern Ireland.
How does the Help to Buy scheme work?
The Help to Buy equity loan scheme in England can help first-time buyers purchase a new-build home with just a 5% deposit. The government equity loan covers a further amount of the home’s value with buyers then having to cover the remainder with a standard repayment mortgage. The equity loan helps as it reduces the size of the mortgage home buyers need, without having to save a larger deposit.
The size of the equity loan available depends on where you live. Throughout England, homebuyers can borrow up to 20% of a home’s value. However, for those looking to buy in London, 40% loans are available, due to the higher property prices in the capital.
Interest isn’t charged on the equity loan for the first five years, but in year six you start paying monthly interest equivalent to 1.75% of the equity loan. The interest rate then rises by an amount equal to Consumer Price Index (CPI), which is a tool the government uses to measure inflation, plus 2% in April each year. The payment only covers the interest, not any of the loan amount.
From the beginning of your loan you will also have to pay a management fee of £1 per month.
The equity loan itself can be paid back in full or in part (as long as it covers a minimum 10% of the property value) at any time. You must fully pay back the equity loan if you sell your property, pay off your mortgage or come to the end of the equity loan term, which is typically 25 years. You stop paying interest once the loan is repaid in full.
What were the 2021 changes to the Help to Buy scheme?
The original Help to Buy equity loan scheme was replaced by a new scheme for 2021-23, after which the scheme is due to end. Homebuyers wanting to use the scheme have until 31 October 2022 to reserve a property and apply for an equity loan, a date set to hopefully allow sufficient time for the buying process to complete legally ahead of the final scheme end date of 31 March 2023.
Unlike the previous scheme, which was available to those taking their first step on to the property ladder and existing homeowners, the 2021-23 Help to Buy equity loan scheme is only available to first-time buyers.
In addition, while both versions of the scheme allow applicants to take an equity loan worth up to 20% of the property value (or 40% in London), Help to Buy 2021-23 introduced regional price caps, limiting how much the house that is being bought can cost. For example, buyers in London can use Help to Buy for new-build house purchases worth up to £600,000, while the maximum property value allowed for those buying in the East Midlands is £261,900.
What about Scotland, Wales, and Northern Ireland?
Help to Buy is available in Wales but the equity loan scheme has slightly different rules.
As in England, homebuyers in Wales who can provide a 5% deposit can get an equity loan that will cover a maximum of 20% of the value of a new-build home and has a five-year interest-free period. The main differences are that the price cap is set at £250,000 across all of Wales and the scheme is still available to existing homeowners, as well as first-time buyers.
Forces Help to Buy scheme
Armed Forces personnel can borrow up to 50% of their annual salary interest-free to put towards a home deposit. The Forces Help to Buy scheme caps loans at 50% of service personnel’s annual salary up to a maximum of £25,000, which can be repaid over a period of 10 years. Repayments can begin immediately, six months after receiving the loan, or during the final 10 years of service.
Final applications for the scheme must be made by 31 December 2022, after which the scheme is set to end.
The advantages of Help to Buy – is it right for me?
Since its launch in 2013, the Help to Buy equity loan scheme has helped over 355,000 homebuyers get a foot on the housing ladder, according to government data published in May 2022. Here are some reasons why Help to Buy might be the right option for you when looking to buy your first home.
1. You only need a 5% deposit
Saving a deposit can take years, especially if you want to qualify for a low loan-to-value (LTV) mortgage in order to try to access the most competitive deals. With an equity loan, the Help to Buy scheme allows you to purchase a home with a smaller mortgage, at a lower LTV, even if you only have a 5% deposit.
2. You may be able to access low mortgage rates
Typically, a lower LTV means you can access a wider choice of mortgages and lower interest rates. So whereas a 5% deposit would normally limit you to a 95% LTV mortgage, if you use Help to Buy to access a 20% equity loan, you can start looking at 75% LTV mortgages, where the rates should be more competitive. If you’re buying in London, where a 40% equity loan is available, an LTV of 55% could mean you’re able to access even lower rates. You will need to factor in the cost once the equity loan becomes repayable.
» COMPARE: Mortgages and rates
3. Equity loans are interest-free for five years
With an interest-free loan period of five years, the potential strain of repaying the equity loan at the same time as your mortgage is removed in the short term. The early years of mortgage repayment are usually the toughest, particularly if your career is still developing or you’re raising a family.
Hopefully, this breathing space will allow you to get your finances in order before you need to start paying interest on the loan.
Remember, though, that this leaway applies to the Help to Buy equity loan only, and you’ll still need to make the monthly repayments on your mortgage.
» MORE: Mortgage repayment calculator
4. Low rate of interest when you start to pay
The interest rate of 1.75% that you’ll eventually be charged on an equity loan in year six stacks up well against the best personal loan rates.
That said, with the interest rate then increasing each subsequent year by the rate of CPI inflation plus 2%, be aware that this has the potential to quickly increase.
5. An equity loan can be paid off at any time
You can reduce what you owe at any time by paying off either a proportion of the equity loan, equivalent to at least 10% of the current value of your home, or the entire amount in full.
If you manage to fully repay your loan within five years, you won’t pay any interest at all. However, a £200 administration fee is payable for each part-repayment or when making a full repayment.
The disadvantages of Help to Buy – is it right for me?
Despite its obvious benefits, the Help to Buy equity loan scheme has some potential pitfalls to be aware of too. Here are some of the possible disadvantages that homebuyers should consider.
1. The amount you must repay isn’t fixed
Repayments on an equity loan are based on a percentage of your home’s value at the time you want to repay. This means the amount you must pay back can change as the housing market and the value of your property fluctuates.
If your home goes up in value, you will need to repay more than the government initially loaned you. For example, if you took out a 20% Help to Buy equity loan on a property worth £180,000, this loan would be worth £36,000. However, should you want to repay in full, and your house has risen in value to £200,000, you would have to pay back £40,000 (20% of £200,000).
2. Equity loan interest rates can rise fast
After your five-year interest-free period ends, you will pay 1.75% interest in your sixth year of having the loan. This is not unreasonable compared with the rates you might pay on other loans, but by increasing in line with CPI inflation plus 2% each year after, there is the potential for it to rise quickly and significantly.
3. Not all lenders offer Help to Buy mortgages
Help to Buy mortgages are not offered by all lenders, so it’s vital to check if they do. Bear in mind as well that if a lender does offer Help to Buy mortgages, the interest rates and terms might differ from its equivalent standard mortgage products.
Mortgage deals for Help to Buy are usually more competitive than if you used your 5% deposit to take out a 95% LTV mortgage because the equity loan means you effectively have a larger deposit and can borrow at a lower LTV where rates are lower. However, if you were to compare a standard 75% LTV mortgage to a Help to Buy 75% LTV mortgage, you might find the Help to Buy mortgage has a slightly higher rate to reflect the added risk that, with an equity loan, you effectively have two loans against the property.
It is always a good idea to shop around for mortgages to see whether Help to Buy is the most suitable option.
» COMPARE: First-time buyer mortgages
4. Remortgaging can be difficult
Having a Help to Buy equity loan can sometimes make it more difficult to remortgage. This is because there aren’t many Help to Buy remortgage deals to be found and most are only available to those who have paid off their equity loan. If you still have your equity loan outstanding, you can usually expect higher remortgage rates and fees.
The Help to Buy scheme also charges a flat £115 fee to remortgage, but depending on your lender’s standard variable rate, it could still be worth remortgaging.
5. Help to Buy is only available on new-build homes
If you prefer older architecture, then Help to Buy might not be for you. That’s because the Help to Buy scheme is limited to new-build properties, and only to homes built by developers that are taking part in the scheme too. There are Help to Buy agents who can help you find eligible properties in your area.
6. You may need permission to make alterations
If you want to alter the structure of a property you’re buying using a Help to Buy equity loan, you must get permission before proceeding. It’s possible major works will not be approved if you have an outstanding loan because the government would prefer the amount you owe not to increase, which could happen if the alterations increase the value of your property. If you don’t get permission, any rise in your home’s market value is added to your equity loan. You don’t need permission to redecorate or install a new kitchen or bathroom.
A £50 administration charge is payable when seeking permission.
7. You could fall into negative equity
A House of Lords committee report, published in January 2022, suggested that in areas where help was needed the most, rather than working to support buyers, the Help to Buy scheme had inflated house prices so much that buyers would actually have been in a better position had the scheme not been introduced. The Financial Conduct Authority, the financial watchdog, also suggested in 2020 that those using Help to Buy are at greater risk of falling into negative equity if property prices start to fall, because the value of new-builds can quickly fall once they’ve been occupied.
Negativity equity is when the market value of a property falls below the amount that is left to repay on a mortgage. But with Help to Buy, your equity loan could still be outstanding too. The major problems with negative equity are that it can make it hard to remortgage and represent a significant barrier if you want to sell up and move.
» MORE: Learn about negative equity
8. Price caps can limit your options
You must stay within the price cap for the region in which you wish to buy in order to be eligible for Help to Buy, which can restrict the housing options that are available to you. And as the regional boundaries need to be drawn somewhere, there can also be a considerable difference between the caps in two different areas that are not that far away from each other geographically.
Help to Buy scheme pros and cons at a glance
Here is a brief overview of the advantages and disadvantages of the Help to Buy equity loan scheme.
Compare Help to Buy mortgages
If you’re a first-time buyer considering Help to Buy as an option, you’ll need to move quickly, as the deadline for applying for the equity loan scheme of 31 October 2022 is fast-approaching.
Finding a suitable repayment mortgage is also crucial if you’re to fulfill your home-buying aspiration with the aid of Help to Buy.
» COMPARE: Mortgages
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more