Is 'Help To Buy' As Good As It Seems?
The Help to Buy scheme introduced in 2013 closed to applications in December 2020 and requires purchases to be completed by 31 May 2021. The scheme was very popular, with the Office for National Statistics reporting that over the period to December 2019, 263,297 properties with a value of £70.26bn were purchased under the scheme.
If you were hoping to join the scheme you have a second chance! On the back of this success, the government has released “Help to Buy 2”. This scheme opened in April 2021 and runs until March 2023.
How does it work?
The new scheme is intended to assist first time buyers in getting onto the property ladder. All parties purchasing the home must never have owned a property in the UK or abroad and the property must be a ‘new build’ purchased from a home builder who is registered with the scheme. The total price of the property is capped at a maximum of £186,100 in the North East to £600,000 in London with other areas falling in between.
Payment for the property is structured as follows:
5% deposit funded by the homebuyer
20% equity loan (40% in London) funded by the Help to Buy scheme
75% mortgage from a mortgage lender.
The equity loan is interest-free for the first five years. After that period, interest is charged at 1.75% and increases every year by inflation (based on the Consumer Price Index) plus 2%.
The equity loan does not need to be repaid until the property is sold. Repayments of at least 10% of the market value of the property can be made at any stage.
The mortgage must be a minimum of a 25% Loan to Value.
Sounds good, right? Let's look closer
By way of an example, a property purchased for £200,000 when the scheme opened in April 2021 will typically require a deposit of £10,000 an equity loan of £40,000 and a mortgage of £150,000. For the first 5 years, interest/repayments will only be payable on the £150,000 mortgage. In the 5th year, the equity loan will incur interest at 1.75%. Assuming a CPI rate of 0.9%, increasing at 0.1% every year, in the 6th year the interest rate will increase to 4.65% and by the 10th year, the interest rate could be as high as 5.05%. Thus, in year 5 interest on the £40,000 loan will be £700 whilst in year 10 it will be as much as £2,020.
Moneysavingexpert.com has pointed out that under the scheme, the annual rise in interest rates takes place on the 1st of April of the following calendar year and not on the actual anniversary of the loan. As a result, the timing of the purchase can make a difference in the amount of interest that will be payable.
A purchase completed between say 1st January 2022 and 31st March 2022 will begin paying interest of 1.75% five years later (1st January 2027 to 31st March 2027) but the inflation increase will only ‘kick in’ on 1st April of the following year (1st April 2028), providing as much as 15 months at the 1.75% rate.
At the other extreme, a purchase completed on 31st December 2022 will begin paying interest at 1.75% on 31st December 2027 but the inflation rate will already bite on 1st April 2028 - three months later!
Is it a good idea for first-time buyers?
At first glance, this scheme appears to be an ideal way for prospective homeowners to purchase a home with a 5% deposit. However, a few factors should be carefully considered.
As explained, the balance of the cost of the property will need to be funded by a mortgage from a mortgage provider. Because the mortgage is at a lower loan to value and is for a lower amount, these mortgages should attract lower interest rates. However, in practice, lenders have a restricted range of mortgage products available to those using Help to Buy schemes and have been found to offer premium rates on these products.
In addition, the requirement to purchase a new build can also hike up the cost of the property as housebuilders generally price these at as much as 15% to 20% above market rates for similar properties. Obviously, this also limits the range of properties available.
Perhaps the most important consideration is the ability to repay the loans when either moving to a larger property or when a better mortgage deal becomes available.
As its name suggests, the equity loan gives the government an equity proportion of the value of the property. As such, the amount of the loan is not fixed but rather it fluctuates based on the market value of the property. If the property value rises, you will have to repay a larger loan - more than you initially borrowed - and this could impact your ability to put aside funds to climb up the property ladder.
There could also be consequences on your ability to re-mortgage. A high street mortgage provider may argue that the loan to value proportion required to fund the equity loan and the other borrowing is too high.
In view of the above, it may be that a better and more flexible deal is available by either using a government guaranteed mortgage or one of the other standard mortgage products on offer.
Is it a good idea for first the taxpayer?
Help to Buy loans are effectively financed by the taxpayer. So, have they benefitted the country in general?
Since the housebuilders charge a premium for new builds, it is almost certain that taxpayers will have funded assets that will lose value in the short term. In fact, some have reported that one in seven homes purchased under the Help to Buy scheme have lost value even where local property markets are experiencing a boom.
The consensus seems to be that the sector which ultimately benefits from the scheme are the housebuilders. By offering cheaper finance, the scheme has increased demand whilst supply remains constrained. The result is that even with the regional price caps, they can sell stock at higher prices than they would have otherwise fetched.
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