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Is Help to Buy the right option for first-time buyers in 2018?

Mortgages remain cheap but house prices continue to increase

Hundreds of thousands of people have used Help to Buy to get on to the property ladder over the past 5 years – but in a low-rate market, is it still an attractive deal?

Since the government launched Help to Buy in April 2013, more than 300,000 first-time buyers have used its various schemes to purchase their first home, according to data from the Ministry of Housing, Communities & Local Government (MHCLG).

Now, with the flagship equity loan scheme approaching its fifth birthday, mortgage lenders are jostling for position to offer new deals. Which? weighs up whether Help to Buy represents a good deal for cash-strapped first-time buyers in today’s market.

 


Help to Buy approaches its fifth birthday

From its launch in April 2013 to the end of September 2017, MHCLG data shows 144,826 homes were bought using a Help to Buy equity loan, with 81% (116,898) purchased by first-time buyers.

There’s no sign of enthusiasm slowing down – in the third quarter of 2017, provisional stats show 10,132 completions on new homes in England, up from 8,542 last year.

Mortgage lenders are continuing to take an interest in Help to Buy, too.

Earlier this month, Barclays reduced the cost of its two- and five-year fixed HTB deals, and this week, Leeds Building Society expanded its range, including two new mortgages that offer £1,000 cashback.

Buying a home with a small deposit

One of the main benefits of Help to Buy is that buyers can purchase a home with a 5% deposit and a 75% mortgage – with the gap filled by an equity loan of 20% (or 40% in London) provided by the government.

This means they can access considerably cheaper mortgage rates than if they were applying for a standard 95% mortgage.

Best Help to Buy mortgages for buyers with a 5% deposit (by initial rate)

Product Lender Initial rate Revert rate APRC Fees Available direct?
2-year fixed Santander 1.39% 4.74% 4.3% £999 No
2-year fixed TSB 1.54% 3.99% 3.7% £995 Yes
3-year fixed Newbury Building Society 1.74% 4.20% 3.7% £600 Yes
3-year fixed Virgin Money  1.99% 4.79% 4.2% £995 Yes
5-year fixed Barclays 2.15% 3.99% 3.5% £479 Yes
5-year fixed Leeds Building Society 2.19% 5.69% 4.6% £999 Yes

Data from Moneyfacts/Which? Money Compare

Is Help to Buy right for you?

These deals might be attractive, but it’s important to remember that the government will hold a 20% stake in your property until you pay off your equity loan.

You don’t need to start paying this back for five years, but some drawbacks remain.

First of all, the government is repaid based on a percentage of the property’s value – meaning it could reap the rewards of your hard work. If house prices go up – whether due to the market or improvements you make – you could have to pay thousands of pounds more back on your equity loan than the amount you originally borrowed.

Secondly, equity loan interest rates are based on the Retail Prices Index (RPI). This means that you’re essentially taking out a variable rate loan, so your payments could change over time.

Better mortgage deals with a bigger deposit

If you can save a little more than the minimum 5% deposit, you might be better taking out a traditional mortgage rather than the Help to Buy scheme.

Mortgage deals for first-time buyers with a 10% deposit remain very attractive, and there a couple of other key benefits too.

You’ll own all of the equity in your property – so no need to share any profits with the government. You also won’t be limited to buying a new-build home, as you would if you use the Help to Buy scheme.

Traditional mortgages for buyers with a 10% deposit (by initial rate)

Product Lender Initial rate Revert rate APRC Fees Available direct?
2-year fixed Yorkshire Building Society 1.82% 4.99% 4.6% £995 Yes
2-year fixed Natwest 1.84% 3.99% 3.7% £995 No
3-year fixed Barclays 2.19% 3.99% 3.7% £999 Yes
3-year fixed Atom Bank 2.19% 3.75% 3.4% £900 No
5-year fixed Atom Bank 2.44% 3.75% 3.3% £900 No
5-year fixed Barclays 2.49% 3.99% 3.6% £999 Yes

Data from Moneyfacts/Which? Money Compare

Help to Buy and the new-build premium

Buying a new-build property can often be more expensive than buying an older home.

The median price of a property bought using Help to Buy in the third quarter of 2017 was £264,995 – or £250,000 if we look at first-time buyers in isolation, according to Help to Buy stats from the MHCLG.

Yet the average property price in England in November 2017 was £243,399 – or just £204,494 for first-time buyers, according to separate data from the Land Registry.

While the Land Registry uses different metrics than MHCLG, and therefore shouldn’t be directly compared, it broadly suggests that first-time buyers tend to spend more under the Help to Buy scheme.

Evidence from the MHCLG also suggests that the price paid by first-time buyers using Help to Buy has increased significantly over the last five years – from an average of £175,000 in 2013, up to a high of £250,000 in 2018.

Remortgaging a Help to Buy home

It’s worth keeping in mind that remortgaging a home bought using Help to Buy can be difficult, as some mortgage lenders may take the government’s equity loan into account when valuing the property.

The first round of Help to Buy purchasers on five-year fixed-rate deals will soon be looking for new deals, but homeowners may struggle to access the best mortgage deals while their equity loan remains.

With this in mind – and with some Help to Buy mortgages not being available directly from lenders – those considering remortgaging should speak to an impartial adviser before rushing in.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

Categories: Money, Mortgages & property

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