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170,000 first-time buyers have used Help to Buy, but is it right for you?

Homebuyers flock to government's equity loan scheme

First-time buyers account for more than eight in ten purchases made using the government’s Help to Buy equity loan scheme, according to new data from the Ministry of Housing, Communities & Local Government. 

Of the 210,964 properties bought since the launch of the scheme in April 2013 and the end of last year, 171,053 went to first-time buyers.

Help to Buy equity loans were introduced by governments in England, Wales and Scotland to help people on to the property ladder.

But while Help to Buy has been hugely popular, there are a number of pitfalls that prospective buyers should be wary of, some of which made one first-time buyer we spoke to reluctant to use the scheme at all.

Here, we delve into how Help to Buy works and explain the pros and cons of using an equity loan.

 


40,000 first-time buyers used Help to Buy in 2018

Help to Buy is becoming increasing popular with first-time buyers looking to get on to the property ladder.

In 2018, 42,748 properties were bought by first-time buyers using an equity loan, up from 37,478 in 2017.

The table below shows the number of properties purchased by first-time buyers each year since the scheme was introduced.

Year Completions
2018 42,748
2017 37,478
2016 30,673
2015 25,069
2014 22,618
2013 12,467

What is Help to Buy?

The governments in England, Wales and Scotland all offer Help to Buy equity loans.

The biggest equity loans are available in London, where buyers can borrow up to 40% of a property’s value from the government. This means that you can put down a deposit of 5% and take out a mortgage on the remaining 55%.

The loan is interest-free for the first five years, after which you’ll have to start paying interest. You’ll need to repay the loan in full after 25 years or when your mortgage ends, whichever comes first.

Help to Buy is open to first-time buyers and home movers but is restricted to new-build homes on developments that are participating in the scheme. The London scheme is more generous than elsewhere in Britain, as the table below shows:

Help to Buy scheme Maximum equity loan Maximum property price
England (excluding London) 20% £600,000
London 40% £600,000
Scotland 15% £200,000
Wales 20% £300,000

Challenges with Help to Buy

There are several things to consider if you’re thinking about taking out an equity loan.

The first is the interest you’ll have to pay back on the loan, which kicks in after five years of ownership.

From year six of your equity loan onwards you’ll have to start paying interest at a rate of 1.75%. This rises by any increase in the Retail Prices Index (RPI) plus an additional 1%.

The government uses a representative RPI of 5% in its official calculations.

The table below shows how much interest you might expect to pay on a £200,000 home with a 20% equity loan (£40,000) outstanding.

Year RPI+1% Annual interest Annual cost (interest plus £1 a month management fee)
6 6% 1.75% £712
7 6% 1.86% £754
8 6% 1.97% £799
9 6% 2.08% £846
10 6% 2.21% £896

Availability

Another issue is that limited availability of properties offered under the Help to Buy scheme.

Research published earlier this year revealed that the number of Help to Buy properties in London fell 64.3% in February 2019.

The borough of Hammersmith and Fulham, for example, only had one Help to Buy property for sale in February, making it the worst London Borough for Help to Buy property availability.

Price

Help to Buy has also come under fire for inflating the price of new-build homes.

According to the Land Registry’s House Price Index, the average price of a new-build home at the end of 2018 was £301,483 – well in excess of the £243,102 recorded for resale properties.

Case study: ‘Initially we thought about using Help to Buy, but I was sceptical’

First-time buyer Danni Croucher considered using the Help to Buy scheme when she and her boyfriend Jack were looking for their first home.

After scrutinising the scheme, however, the 24-year-old from Twickenham decided against getting an equity loan.

She says: ‘When Jack and I initially started looking for properties we thought about using the Help to Buy Equity Loan Scheme.

‘After researching the scheme a bit more, I became sceptical about whether we’d make the best return.’

The couple found the interest and fees that would be applied in year six of the equity loan to be a major concern.

‘If we wanted to avoid paying the fees we’d have to sell our property before the five years were up. And at that point, there was no guarantee that we’d be able to make enough of a return to move onto a new home,’ says Danni.

‘Essentially we wanted a home that we could live in without the burden and stress of having to sell before we were ready and decided against using an equity loan.’

Danni and Jack used a number of savings accounts to help them build up a deposit.

‘Eventually, Jack and I managed to reach our 10% deposit target of £25,600 by pooling our savings and inheritance.’

‘We’ve now moved into our new home and can’t wait to make it our own.’

New Help to Buy scheme from April 2021

In last year’s Autumn Budget, the government announced it would replace Help to Buy with a new scheme limited to first-time buyers from April 2021.

The scheme will run for two years, until 2023.

Prices will be capped at 1.5 times the current forecast average first-time buyer house price in each region – with a maximum of £600,000 set in London.

The caps will be as follows:

Region Help to Buy equity loan price cap (2021-23)
North East £186,100
North West £224,400
Yorkshire & the Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
London £600,000
South East £437,600
South West £349,000

Alternatives to Help to Buy

If you don’t qualify for Help to Buy or just don’t like the sound of the equity loan scheme, there are several Help to Buy alternatives to consider.

Shared ownership

Shared ownership enables you to buy a share of a property – usually between 25% and 75% – and pay rent to a housing association on the remaining portion of the property.

Some shared ownership schemes allow you to increase the share of the property you own at a later date through a process called ‘staircasing’, but this can be costly.

Rent to Buy

Rent to Buy was introduced to help people save enough of a deposit to get onto the property ladder.

The scheme allows you to rent a home at 20% below the normal market rate for up to five years.

During this time you’ll get the option to either buy the entire property or purchase a portion of it through shared ownership.

The number of Rent to Buy properties available is quite limited and you may have to pass additional eligibility criteria depending on the housing association that the property is offered under.

Get help from your parents or family

Aside from opening the doors to the infamous ‘bank of mum and dad’, there are a number of ways that parents can help first-time buyers.

Guarantor mortgages allow parents to take on some of the lender’s mortgage risk by guaranteeing to meet any repayments if you fail to make yours on time.

Alternatively, joint mortgages allow you to buy a property with your parents, although, they could face a 3% stamp duty surcharge If they already own a home.

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