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How much money do you need to buy a home with London Help to Buy?

Properties still too costly for some buyers despite 40% equity loan

You can buy a shiny new build-home in London with a deposit of less than £20,000 using London Help to Buy. But is it really as good a deal as it seems?

Under the government’s scheme, first-time buyers and home movers in London can get an equity loan of up to 40% of the property price, in theory making expensive new-build properties more affordable.

Here, we take a look at how much you’ll actually need to earn to get your hands on a home, and explain some of the associated costs of London Help to Buy.

  • If you’re considering buying a home, you can get expert advice on your mortgage options by calling Which? Mortgage Advisers on 0800 197 8461.

Nearly 7,000 buyers have used London Help to Buy

Help to Buy equity loans, first launched in 2013, gave buyers a government loan towards the purchase of a new-build home.

While Help to Buy has been available in London since the beginning, since February 2016 the government has allowed buyers in the capital to claim a loan of up to 40% of a property’s value. That’s double the 20% on offer elsewhere in England.

Loans are available on new-build properties priced up to £600,000.

According to government statistics, between February 2016 and the end of 2017, 6,867 homes in London had been bought using the scheme, with the vast majority (6,547) going to first-time buyers.

Size of equity loan Number of purchases
Less than 20% 140
20% 1,181
20%-40% 791
40% 4,755

 

New London Help to Buy developments

The median purchase price of a home in London for first-time buyers is currently £392,500, while other buyers pay a median price of £468,120, according to stats from MHCLG.

For buyers who bought an equity loan of more than 20%, the mean purchase price of homes is £450,933, the same stats show.

These eye-watering figures above help to explain why the government has intervened in the London market by offering larger equity loans.

Housebuilders are buying in, too, with a range of new developments offering London Help to Buy springing up around the capital.

For example, the Essex Brewery development in Walthamstow offers one-bedroom flats from £389,995.

In theory, this means these properties are available with a deposit of less than £20,000.

Elsewhere, Berkeley has recently launched new homes in its Royal Arsenal Riverside development in Woolwich, with prices starting at £485,000 under London Help to Buy.


How much do I need to earn to use London Help to Buy?

This is the most pressing question asked by first-time buyers who would need to utilise the full 40% equity loan.

Using the mean purchase price of £450,933, buyers making the most of equity loans using London Help to Buy would need around a minimum deposit (5%) or just over £22,500.

On top of this, assuming you obtain the full 40% equity loan, you’d need a mortgage for 55% of the purchase price, or around £248,000.

As a general rule, you can only borrow up to four times your annual income, which means buyers would need to earn around £62,000 a year.

While this figure might be affordable for some couples, it’s considerably higher than the earnings of the majority of young people in London.

Equity loans and remortgaging

Help to Buy can help you onto the housing ladder, but you have to consider what happens next.

First-time buyers commonly secure two or five-year fixed-rate mortgages, then switch deals at the end of the term to avoid being moved on to their lender’s standard variable rate, which often costs considerably more.

Unfortunately, however, some lenders will only allow homeowners to remortgage if they pay off their equity loan in full when doing so.

To do this in London, your property will need to have increased in value by up to 40%, which over two or five years is incredibly unlikely. This means some homeowners could end up trapped on higher rate deals.

And if you are lucky enough to have significant capital growth in your property, you’ll be giving 40% of it away when selling the property, as the equity loan is a percentage of value, not a set amount you borrowed. This could make it difficult to progress up the ladder.

It remains to be seen whether more lenders offer Help to Buy mortgage and remortgage products if it is announced that the scheme will run beyond its anticipated closing date of 2020.

Stamp duty and service charges

You’ll need to pay stamp duty on the full cost of the home, including the share of equity that the government will own. On a property priced £400,000, that’s an extra £5,000 for a first-time buyer. Use our stamp duty calculator to find out how much you’ll pay.

If you’re buying a flat, it’s likely to be a leasehold property. This means you’ll need to pay ground rent (a tax on the land) to the freeholder. This can cost up to a few hundred pounds a year, though watch out for any punitive escalating clauses.

You’ll also have to pay a service charge for the upkeep of common areas. Find out how much this will cost before you jump in, as it can vary significantly from development to development.

Ground rent and service charge reforms are being considered by the government following the exposure of the leasehold scandal – and its likely that houses being sold as leasehold will be banned.

London Help to Buy alternatives

I‘ve saved a deposit but am unsure about the Help to Buy scheme: Consider buying an existing property. They tend to be cheaper than new-build homes, and with 95% mortgages becoming more affordable, you could find a decent deal.

I want to get on to the ladder in London but lack the money to do so: Looking further afield may be your best bet, but if you have your heart set on a London property, you could consider a shared ownership scheme. This will allow you to buy a portion of a property (from 25%) and pay rent on the rest. Shared ownership can be prohibitively expensive for many buyers, so do your research in advance.

I’m just starting to save: If you’re saving to buy your first home, you can get a boost of 25% on your savings by opening a Help to Buy Isa or lifetime Isa. Check out our full guides to find out more.

Get a free call back from a mortgage adviser

If you want to discuss your mortgage options, you can get a free call back from an adviser by filling out the form below.

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.

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