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Help to Buy Scotland extended: does the scheme have a future?

Find out how Help to Buy is funded in the UK

The Scottish government is extending its Help to Buy scheme beyond the original 2019 closing date, while funding in the rest of the UK remains committed until 2020.

We take a look at how Help to Buy is funded and whether you should take advantage of the schemes available before they expire.

  • If you’re hoping to get a mortgage using a Help to Buy scheme, Which? Mortgage Advisers offer whole of market, impartial mortgage advice. Simply give them a call on 0800 197 8461.

What is the future for Help to buy?

Originally due to close in 2019, the Help to Buy equity loan scheme will be extended for two years in Scotland, with an additional £100m investment committed this week.

To date, Help to Buy Scotland has helped over 12,000 households into a new home since 2013, and the new investment is expected to fund an additional 4,000 purchases.

Elsewhere in the UK, the equity loan scheme was given a £10bn investment last October, which should extend its operation to 2021. First launched in 2013, the scheme was then extended in the 2014 Budget, with an end date of 2020.

Since its inception, the equity loan has assisted 130,000 households to buy homes. The latest investment is expected to finance a further 135,000 transactions.

The Help to Buy Isa, on the other hand, which provides a savings boost to first-time buyers, will be withdrawn on 30 November 2019. Savers will be able to continue paying in but must claim their bonus by 1 December 2030.

How does Help to Buy work?

Help to Buy is a government scheme designed to help people get on the property ladder or buy a new home without having to save a large deposit.

Under the equity loan, first-time buyers and existing homeowners buying a new-build property worth up to £600,000 can borrow 20% of the value of a property interest-free for the first five years (or 40% if you wish to buy in London).

To qualify for the scheme you need to put down at least 5% of sale price of the new build property as a deposit.

Example: You want to buy a new build home in Brighton costing £200,000

  • You pay deposit (5%): £10,000
  • You get an equity loan from government (20%): £40,000
  • You get a mortgage (up to 75%): £150,000

The Scottish scheme is slightly different, offering 15% of the property price on homes valued at up to £200,000.

Interest on Help to Buy equity loans falls due

The equity loan scheme was first launched in April 2013, meaning the first cohort of people who signed up to the scheme will now be liable to pay interest.

In year six, you will have to start paying an administration fee of 1.75%. After that, you’ll pay 1.75%, plus the Retail Price Index (RPI), and an additional 1%.

If you are due to start paying back interest on your Help to Buy equity loan, it’s important to note that these repayments only cover interest and therefore do not reduce the size of your loan. You’ll also need to pay interest on the mortgage itself.

Often, borrowers opt to remortgage after five years to unlock equity in their property, and use this to pay off their Help to Buy loan.

How much do I owe with Help to Buy?

Under the Help to Buy equity loan scheme, you owe the government a share in the value of your property. That means if your property increases in value, so will the amount you need to repay.

If you choose to pay back your equity loan before the interest rate kicks in, you will owe the government your original loan price plus 20% of any change in the value of the property.

This means you’ll benefit less from equity growth in your property than you would if you took out a mortgage, where you borrow a set amount.

Example: You bought a new-build home in Brighton in April 2013 costing £200,000, using an 20% equity loan of £40,000.

  • Your property increases 25% in value and is now worth £250,000
  • To repay your equity loan, you would owe the government the original £40,000 plus an additional 20% of the £50,000 increase in the value of the property.
  • This equates to £40,000 + £10,000 = £50,000

Alternatives to Help to Buy equity loans

If you don’t think the Help to Buy equity loan scheme is for you, there are some alternative ways to get onto the property ladder.

Help to Buy Isas

Help to Buy Isas aim to help first-time buyers, over the age of 16, to save up for a mortgage deposit to purchase a property worth up to £250,000 (or £450,000 if you’re buying in London). Unlike other schemes it is not limited to new-build homes.

Any savings deposited into Help to Buy Isas won’t be taxed and for every £200 that you save, the government will pay you a £50 bonus towards the purchase of a property, up to a maximum bonus of £3,000 tax-free.

In addition to the government’s contributions, cash deposited into a Help to Buy Isa will earn interest from the bank in the same way as it would in any other Isa.

To qualify for a Help to Buy Isa, you need to be a first-time home buyer and the government bonus will only be paid when you buy a property. Over 1m Help to Buy Isas have now been opened by first-time buyers, but the scheme is closing on 30 November 2019.

See how it works in our guide to Help to Buy Isas.

90% mortgages

If you can afford to save a little longer for your deposit, you may be better off taking out a mortgage deal rather than a Help to Buy loan.

On one hand, you’ll need to start repaying the mortgage, plus interest, from the day you take it out. Rates for 90% deals tend to be higher than those for larger deposits.

But over time, you’ll reduce the amount you owe, so that your interest payments will also decrease. You’ll also owe the bank a set amount, not a share, so that you’ll benefit from equity growth if property values rise.

You can find out more about mortgage types in our guide to applying for a mortgage.

Shared ownership

The shared ownership Help to Buy scheme is for non-homeowners (including people who have owned a property previously but don’t have one currently) earning £80,000 a year or less.

For London this threshold increases to £90,000 or less a year.

Under shared ownership, you buy a stake of between 25% and 75% of the property using a deposit and a mortgage. You then pay rent on the remaining share of the property which is owned by the local housing association.

It is possible to buy a greater share of your property at any time from the housing association and the cost of your increasing share will depend on the market value of your property at the time.

Find out how it works in our guide to shared ownership.

Lifetime Isas

The Lifetime Isa is designed to help people under the age of 40 buy their first home or save for retirement.

You can save up to £4,000 a year and the government will top up your savings by 25%. This means that you earn an extra £1 for every £4 that you save.

The money you save can be put towards buying your first home (up to £450,000).

Learn whether it’s right for you in our guide to Lifetime Isas.

  • Which? Mortgage Advisers can help you find the best mortgage deal for your personal circumstances – request a free call back using the form below.

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

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