What are the Pros and Cons of Help to Buy Schemes?
The Help to Buy equity loan scheme has helped over 200,000 homebuyers buy a house. It means buyers with a smaller deposit can improve their chances of securing a mortgage and getting on the property ladder. However, this way of buying a home has its drawbacks too.
What is the Help to Buy scheme?
Help to Buy is a series of government schemes designed to help first-time buyers purchase a new property. Help to Buy is only available on new-build homes from certain developers.
There are several elements to the government’s Help to Buy initiative: Help to Buy: Equity Loans, Help to Buy: Shared Ownership, and Help to Buy ISAs (which are now closed to new applications).
How does the Help to Buy scheme work?
The Help to Buy: Equity Loan scheme allows buyers to purchase a new home with just a 5% deposit. The government equity loan covers a further amount of the home’s value with the remainder covered by a standard mortgage. The useful thing about equity loans is they allow homebuyers to have a smaller mortgage, without needing to save up a large deposit.
The size of the loan available depends on where you live. Throughout England, homebuyers can borrow 20% of a home’s value. For those looking to buy homes in London, 40% loans are available, due to the higher prices in the capital.
Interest won’t accrue on the equity loan for the first five years, but after this period you will need to start paying interest. These charges are not capital repayments, so the total amount you owe will remain outstanding until the end of the loan term or until you sell the property, unless you have chosen to repay it before this.
What are the 2021 changes to the Help to Buy scheme?
The original Help to Buy: Equity Loan scheme will be replaced by a new scheme for 2021-23, after which the scheme is due to end.
Unlike the previous scheme, the 2021-23 Help to Buy: Equity Loan scheme will only be available to first-time buyers.
While applicants can still receive a loan worth 20% (or 40% in London) under this new scheme, there will be regional price caps on how much your house can cost. So, buyers in London can use the scheme for house purchases up to £600,000, while buyers in the East Midlands for example will only be able to spend up to £261,900 on their first property
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What about Scotland, Wales, and Northern Ireland?
There are different rules around the UK.
The equity loan scheme works slightly differently in Scotland and Wales.
In Scotland, you can get a 15% equity loan on a property priced up to £200,000. It also differs from the English scheme as the loan is interest-free for its lifetime, rather than only 5 years.
In Wales, the equity loan will cover a maximum of 20% of the value of a new build home worth up to £300,000. Like the English scheme, there is a 5-year interest-free period.
There is currently no equity loan scheme in Northern Ireland, although they do offer other forms of help to those looking to buy a home.
Help to Buy Armed Forces
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 £25,000, and they are repaid over 10 years. The scheme is set to run until the end of 2022.
The advantages of Help to Buy – is it right for me?
Help to Buy has helped 420,000 people get a foot on the housing ladder (as of October 2018). Here are some reasons why Help to Buy might be the right option for you when looking to buy your first home.
1. You don’t have to wait until you’ve built your deposit
Saving for a deposit can take years, especially when homebuyers want to get a low loan to value (LTV) rate in order to access the most competitive deals. So, with their equity loan, the Help to Buy scheme allows you to purchase a home with a smaller mortgage, even if you only have a 5% deposit.
For example, instead of being limited to a 95% mortgage, if you use Help to Buy to access a 20% loan (or 40% in London), your mortgage will only be 75% or 55% of the property’s value.
2. Access to cheaper mortgage rates
With the assistance of a Help to Buy equity loan, you can access a relatively low loan to value mortgage and some more competitive deals than if you could only get a 95% mortgage. Typically, the lower your loan to value, the more competitive your mortgage rate.
3. Your loan is interest-free for five years
With an interest-free loan period, the strain of repaying the loan at the same time as your mortgage is removed. The early years of mortgage repayment are usually the toughest, as they might come as your career is still developing or you’re facing the cost of raising a family.
Having this bit of breathing space can allow you to get your finances in order before you start paying interest on your loan.
Remember, though, that during this period, you will still be paying interest on your mortgage. How much depends on the type of mortgage you took out, and the cost of your home.
4. You’ll eventually pay an initial rate of interest of 1.75%
This is quite a competitive rate of interest. You’ll start paying interest on your loan in the sixth year after taking it out.
However, following the sixth year, the interest rate will increase each year by the rate of inflation plus 1%. Depending on how inflation affects interest rates, you could see yourself paying much more than you’d anticipated.
5. You can reduce your loan when you want
You can reduce what you owe at any time by paying off sizeable chunks of the loan at once. This is called staircasing, and means you pay back a proportion of the loan, worth at least 10% of the current value of your home, or even pay off the loan in full. To do so, you’ll need to pay a £200 fee, and in some instances, you’ll have to arrange and pay for a valuation.
If you manage to repay your loan in full within five years, then you won’t face any interest charges.
The disadvantages of Help to Buy – is it right for me?
Help to Buy may have helped many hundreds of thousands of Brits buy a property. However, it does have some pitfalls. Some detractors go as far as to say it’s causing a housing bubble, which will burst when the scheme ends. Others point to the fact that the scheme is making some developers extremely rich.
So, what are some of the disadvantages for buyers?
1. The amount you owe isn’t fixed
Your loan is based on a percentage of your home’s value, which can change as the housing market fluctuates.
So, if your home goes up in value, you will be required 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, if, when you come to sell, your house has risen in value to £200,000, you would have to pay back £40,000 (20% of £200,000).
2. Your loan will become more expensive
After your interest-free period ends, you will pay an additional 1.75% interest in your sixth year of having the loan. After this, your interest rates will increase based on the Retail Price Index (RPI), plus 1%. So, there’s a possibility that if interest rates increase you might be asked to repay an unmanageable amount.
From the beginning of your loan you will also have to pay a small monthly management fee.
3. Only certain lenders offer Help to Buy mortgages
Help to Buy mortgages are not offered by all lenders. Those lenders that do offer Help to Buy mortgages will vary them from their standard mortgage products. This is because you are only one of three parties in your mortgage, which includes yourself, the government and your provider.
Mortgage deals for Help to Buy are usually more competitive than other low deposit mortgages, such as 95% loan to value mortgages. It is always a good idea to shop around when looking for mortgages and compare lenders to find the most favourable rates, to see whether a Help to Buy is your best option.
4. It can be hard to remortgage
Help to Buy can also cause issues when you want to remortgage. This is because a lot of remortgage deals are only available to those who have paid off their equity loan. However, more lenders are starting to offer remortgaging options for those with an outstanding equity loan on their property.
The Help to Buy scheme charges a flat £115 fee to remortgage.
5. Help to Buy is only available on New Build Homes
If you are a lover of certain styles of older architecture then Help to Buy might not be for you. Unfortunately, the Help to Buy scheme is limited to new build properties, so if you would like to take out a mortgage on an older property you’ll have to save up a bigger deposit yourself.
Here’s a guide on what you need to consider when buying a new build.
6. You need permission to make improvements
If you want to make home improvements to a property you bought using a Help to Buy equity loan, you will need to receive permission before proceeding. Normally, major works will not be approved as they would prefer homeowners to repay the loan before making any significant changes.
You would also need to pay an administration charge if you did proceed with any improvements.
7. You could get trapped in negative equity
Many property experts fear that Help to Buy schemes are inflating house prices. There are fears that the property bubble could burst when the scheme is scheduled to end on March 31st 2023.
Negativity equity occurs when the market value of a property falls below the remaining amount to repay on a mortgage. Negative equity is more of a problem short term, especially if you are buying a home as an investment and want to sell it within a certain time frame for a profit.
8. The time of year you buy your home affects interest rates
Regardless of what time of year you buy your house, interest rates will increase every April.. This means interest rates on your loan will not rise exactly a year after you buy your home, leading to some buyers staying on the lower rate for far longer than a year, while others will only be on the lower rate for a couple of months. It all depends what month you buy your property.
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.
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Compare Help to Buy mortgages
Compare First time buyer Help to Buy mortgages. Our free and unbiased comparison table has a wide range of providers. So, if you have decided a Help to Buy mortgage is for you, you can find the most favourable rate easily, thanks to our clear table.
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