Mortgage

In the five years since its inception, the Government has committed over £9.9 billion to Help to Buy. This is a scheme designed to help first-time buyers onto the housing ladder and home movers up a rung. Independent analysis shows that both the rate of take-up and the size of equity loans being given are growing.

So, how does Help to Buy work?

The Help to Buy scheme offers an equity loan where the government lends first-time buyers and existing homeowners money to buy a newly-built home.

Help to Buy Equity loans – how they work

• You need at least 5% of the sale price of your new-build flat or house as a deposit.
• The government lends you up to 20% of the sale price or up to 40% in Greater London
• You apply to borrow the rest from a mortgage lender, on a repayment basis.

EXAMPLE 1 – Cost of home = £200,000

Your deposit (5%) £10,000
Equity loan (20%) £40,000
Mortgage (75%) £150,000
TOTAL (100%) £200,000

Who can’t apply for the scheme?

• You can’t use the Help to Buy scheme to buy a second home or a property to rent out.
• If you use Help to Buy, you can only take out a repayment mortgage.
• You can’t buy a property for more than the set price limits.

When you sell your home, or the mortgage is paid off, you repay the equity loan plus a share of any increase in the value. It works like this:

EXAMPLE 2 – selling your home (value = £250,000)

Increase in value = 25%
Equity loan repayment = £50,000 (£40,000 + 25% profit)
Mortgage = £150,000 (less capital repayments)
Your share = £50,000 (excluding any moving costs)

The remaining equity figure after moving costs can be used as a deposit on your next home. The exact amount also depends on how much you’ve paid off your mortgage. You can also pay back part or all of the loan at any time. The minimum percentage you can pay back is 10% of the market value of your home. The amount payable will depend on the market value at the time.

What are the advantages of the Help to Buy Scheme?

• If you want to move home but cannot quite afford the deposit, the Government’s Help to Buy scheme could make a big difference.
• You get help buying a home enabling you to get on to the property ladder, boosting the housing market, and helping the wider economy
• You need a smaller deposit to buy a home through Help to Buy which is set at a more manageable level of 5%. This is much lower than many other mortgage options meaning you could buy more quickly and own a brand new property
• There are no loan fees due in the first five years although the amount owed can still increase during that time. The equity loan will rise and fall with the housing market, so if the house value increases in value, so will the amount owed.
• For first time buyers in particular, these first five years can be some of the most financially strenuous, so a few years of breathing space may be viewed as an advantage.
• Mortgage payments would still be made during this time (which will include interest charged by the mortgage lender), but no interest will be added to the Help to Buy loan.
• There is the potential to access cheaper mortgage rates depending on individual circumstances. The fact you will need to borrow less overall may also mean being able to qualify for a mortgage in the first place. By needing to borrow a lesser Loan to Value, a more competitive rate of interest may be possible than if applying for a standard 95% mortgage.
• You get a competitive Help to Buy loan rate (after five years). After not paying interest on the equity loan for five years, the initial rate of interest is 1.75% in the sixth year.

What are the drawbacks of the Help to Buy Scheme?

• Although Help to Buy may give you the opportunity to purchase a new build home that you may not otherwise be able to afford, there are some limitations to carefully consider.
• The Help to Buy loan will become more and more expensive. Although you will benefit from five years without interest, after this time the rate of interest applied to your loan will increase each year. While you will only pay 1.75% in your sixth year, each year your loan fee will increase by 1% plus any RPI increase.
• The creeping annual cost of fees could put pressure on your monthly budget. Also, should RPI increase dramatically in any 12 month period, so would the additional rate of interest applied to your loan.
• The amount you will ultimately need to repay on your Help to Buy equity loan is not fixed. Instead it will fluctuate with the market value of your property because it is percentage-based. This means that if your property has risen in value you may have to pay significantly more than you originally borrowed.
• Currently the Help to Buy scheme is only available on new properties which may limit the choice of home. It is also only offered by some developers so the choice of property will be limited too.
• It may feel like paying a premium for buying new, so unless you are really wanting a new property, other options should also be considered.
• Not all providers offer Help to Buy mortgages, and those that do sometimes make them different from their standard mortgage packages. This is because a third party is involved with the purchase of your property, and they also have a claim to part of the sale value.
• The potential danger of negative equity as some property experts claim that the Help to Buy scheme has started to inflate house prices. They are concerned that it is causing a housing bubble that will burst when the scheme ends, trapping a vast number of buyers in negative equity.
• If you are buying a new home as an investment in the hope you will be able to move in the short to mid-term this could be an issue – if you are planning on living in the property for many years this will be less of a problem.
• You do not know if the terms might change. While you can only plan your finances based on information you currently have available, a future government could review and change the terms of the scheme.

Your home maybe repossessed if you do not keep up repayment on your mortgage.

For more information on mortgages contact Martin Crump, one of our independent mortgage advisers at Temple Mortgages on 01305 213150