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First-time buyers: how to get the cheapest Help to Buy mortgage rates

195,000 homes have been bought with a Help to Buy equity loan

First-time buyers using the government’s Help to Buy scheme can benefit from mortgage rates of well below 2%, as competition between lenders heats up.

It’s been a mixed couple of weeks for Help to Buy – while new data shows the scheme has helped more than 150,000 first-time buyers get on to the property ladder, it’s also faced criticism over its effect on house price inflation.

While the pros and cons of Help to Buy are certainly open to debate, one area where the scheme remains highly competitive is in the mortgage deals available to its users.

Here, we take a look at the cheapest rates currently available on Help to Buy mortgages, and offer advice on paying off an equity loan before interest kicks in. 

 


Nearly 200,000 Help to Buy homes sold

New government data shows that between its launch in April 2013 and the end of September 2018, 195,219 homes were bought using Help to Buy equity loans in England.

Of these, more than eight in ten (158,013) went to first-time buyers.

On average, buyers using the scheme spend £255,542 for a property, and benefited from an average loan of £54,630. This means that in total, the government has invested over £10.6bn in equity loans.

Find out more: discover the basics of how the scheme works in our full guide on Help to Buy equity loans.

Help to Buy mortgages and cheaper rates

When you buy a home in England or Wales using Help to Buy, you can obtain a 20% equity loan from the government (it’s 40% in London and 15% in Scotland).

This means you can combine a 5% deposit with the equity loan and take out a mortgage on the remaining balance of the purchase price.

Taking out a smaller mortgage means you can benefit from cheaper rates, and there are signs that lenders are cutting the costs of their deals.

For example, last week Leeds Building Society cut the rates on its Help to Buy range by up to 0.23% on both its two and five-year deals.

Lowest rates on Help to Buy mortgages

The tables below show the lowest introductory rates on two-year and five-year fixed-rate mortgages available to people using Help to Buy.

As you can see, the cheapest rates on two-year fixes are well below 2%, while those who wish to fix their rate for five years can do so for less than half a percent more.

Two-year fixed-rate

Lender Lowest initial rate Revert rate APRC Fees
Santander 1.59% 4.00% 3.70% £999
Barclays 1.63% 4.24% 3.90% £749
Halifax 1.69% 4.24% 3.90% £999

Source: Which? Money Compare. 28 February. Links in the table take you to the relevant deal page on Which? Money Compare.

Five-year fixed-rate

Lender Lowest initial rate Revert rate APRC Fees
Barclays 2.02% 4.24% 3.50% £749
Santander 2.04% 4.00% 3.40% £999
Halifax 2.10% 4.24% 3.60% £999

Source: Which? Money Compare. 28 February.  Links in the table take you to the relevant deal page on Which? Money Compare.

How to make the most of cheap rates

When you buy a Help to Buy property in England, you won’t pay any interest on the government’s equity loan for the first five years.

After this, interest kicks in at the rate of 1.75%. Each year, this percentage increases by the level of RPI plus 1% (3.5% at time of writing). Depending on the size of your loan, this means you could face paying hundreds – or possibly thousands – of pounds in interest each year.

And in the current market, it’s unlikely that the value of your property will have grown enough (or that you’ll have repaid enough on your mortgage) to rely on capital growth or equity to pay off the loan in full after five years.

With this in mind, it makes sense to make the most of your five-year interest-free period to give you a better chance of settling the loan before interest kicks in.

  • Overpay on your mortgage: overpaying on your mortgage while you have a cheap rate will mean you’ve paid off more capital in the first five years, helping you to remortgage at a lower LTV and pay off the equity loan after five years.
  • Save to pay off the equity loan: putting some money aside each month will stand you in better stead if you want to pay off your equity loan when your interest-free period ends. Currently, you can obtain rates of 2.42% on a two-year fixed savings account, or 2.7% on a five-year account.
  • Buy out part of the equity loan: it could be possible to buy chunks of the equity loan rather than settle it in one go. If you’d like to make a partial repayment on your equity loan at any time, you’ll need to request permission from the Help to Buy scheme administrator, and pay a valuation fee.

When considering your plans for paying off your loan, it’s important to remember that you pay back a percentage of the property’s value at that time, rather than the amount that you initially borrowed. This means that if the value of your home increases, so too will the amount you pay back.

Find out more: learn about remortgaging options in how to remortgage with a Help to Buy equity loan.

Persimmon and Help to Buy criticism

Help to Buy has been in the news a lot over the past couple of weeks, and not always for positive reasons.

Persimmon, one of the biggest developers of Help to Buy homes, has faced criticism for announcing record profits of £1bn, with some reports claiming that the profit it’s made on each house has tripled since Help to Buy launched in 2013.

Furthermore, a report from the Times claimed the developer could lose its Help to Buy licence due to allegations of poor building standards and hidden charges.

House price increases

New-build properties are generally more expensive than existing ones, but Help to Buy has been accused of inflating house price growth on brand new homes.

This comes as new data from the ONS House Price Index estimates year-on-year price increases of 7.2% on new-build homes, compared with 2.7% on resale properties.

It’s important to state that these figures are estimates and take into account all new-build homes, not just those sold using Help to Buy.

Leasehold scandal

Help to Buy has also come under fire for its role in the leasehold scandal, where some new-build houses are sold as leasehold rather than freehold (usually only flats are sold as leasehold), and both houses and flats are subject to rapidly increasing ground rent charges and punitive ‘permission’ fees.

The government is pressing ahead with banning new houses being sold as leasehold, but to date around 17,975 leasehold houses have been sold under Help to Buy.

Changes to Help to Buy from 2021

The government hasn’t turned a blind eye to issues with its flagship scheme, and in last year’s Autumn Budget it announced a radical overhaul of Help to Buy from April 2021.

From then, the scheme will only be available to first-time buyers, and the maximum amount they’ll be able to borrow will be capped based on the region they’re buying in.

You can learn more about the price caps in our full guide on Help to Buy equity loans.

Help to Buy Scotland and Help to Buy Wales

While the figures in this article have been based on sales in England, Scotland and Wales also run their own Help to Buy schemes.

Help to Buy Scotland allows you to obtain a 15% equity loan on a new-build property priced up to £200,000. Unlike in England, the equity loan remains interest-free.

Help to Buy Wales, meanwhile, offers an equity loan of up to 20% of the value of a new-build home priced up to £300,000. Interest on the loan is phased the same way as in England.

Find out more: get the lowdown on these schemes in our guides on Help to Buy Scotland and Help to Buy Wales.

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