'Should I use Help to Buy?' is one of the most commonly asked questions by first-time buyers looking to get on to the property ladder.
And in truth, it's difficult to give a definitive answer either way. On one hand, the scheme has helped more than 200,000 home buyers, but it's also faced accusations of inflating house prices and lining developers' pockets, not to mention the difficulties you could face when it comes to remortgaging or paying off the loan.
If you're considering Help to Buy, make sure you're aware of everything below before taking the leap.
The size of the loan varies depending on where you live. In England, you can borrow up to 40% of the property price if you're buying in and 20% in the rest of the country, with loans available on properties priced up to £600,000.
The Help to Buy schemes in Scotland and Wales work slightly differently from the English version.
In , you can obtain a 15% equity loan on a new-build home priced up to £200,000. The biggest difference from the English scheme is that the loan is interest-free for its lifetime, rather than just the first five years.
There is currently no equity loan scheme in operation in Northern Ireland.
People in the Armed Forces can borrow up to 50% of their salary interest-free to use as a house deposit, under the Forces Help to Buy scheme.
Loans are capped at £25,000 and must be repaid over 10 years.
Forces Help to Buy is set to run until the end of this year, when its future will be reviewed.
Critics of Help to Buy say that it plays a role in inflating house prices. And while it's normal that new-builds might cost more than existing properties, the size of this gap lends legitimacy to the criticism.
When we look at the median prices paid by people using Help to Buy and compare them to the overall house price figures for England, we see a gap of around 25%.
|Help to Buy (Q4, 2018)||Overall (Q4, 2018)|
|Average first-time buyer price||£259,995||£207,341|
|Average non-first-time buyer price||£319,950||£280,749|
Source: HM Treasury & Land Registry House Price Index
One of the benefits of using an equity loan is that you can take out a smaller mortgage - 75% LTV in England and Wales, 55% in London or 80% in Scotland - unlocking cheaper rates than if you took out a standard .
The downside is that some of the best deals out there simply aren't available to people using Help to Buy.
In England and Wales, equity loans are interest-free for the first five years. After this, interest kicks in at a rate of 1.75%, and rises each year by any increase in the Retail Prices Index (RPI) plus 1%.
The government uses a representative RPI of 5% in its calculations, which we've replicated in the tables below.
On a £200,000 home (with a £40,000 equity loan), you could theoretically find yourself paying nearly £900 a year in interest after 10 years of ownership.
|Year||RPI + 1%||Annual interest||Annual cost (plus £1 monthly admin fee)|
Recent research by Money Saving Expert found that some Help to Buy homeowners face higher interest bills simply because of the month they bought their property.
According to the research, the rate of interest payable on an equity loan doesn't rise on the anniversary of the date when you bought the property. Instead, it increases from 1 April the following year.
This means that theoretically, a homeowner could find themselves on the 1.75% rate for as many as 15 months or as few as three months before their rate increases.
Buying through Help to Buy means you own your property and can do what you want with it - subject to clauses and fees, that is.
Perhaps less surprisingly, permission to let the property out also carries a £50 charge.
Exchange deposits are typically 10% of the purchase price. If you've only got a 5% deposit and are relying on the Isa bonus to make up part of this, you should ask your to negotiate a lower exchange deposit.
When you buy a property using Help to Buy, your bonus will be paid to your conveyancer, rather than directly to you.
Instead, you'll need to formally close your account and get a closing statement from your Isa provider. Once you've got this, you can pass it on to your conveyancer, who will then apply for your bonus.
You should only close your account if you're ready to buy a home, as you'll need to claim your bonus within 12 months of closure.
Unfortunately, nothing is free (particularly when it comes to buying property), and you'll need to take a small financial hit when claiming your bonus.
According to the scheme's rules, your conveyancer can charge you a maximum of £50 plus VAT (£60 in total) to process the bonus.
The equity loan you borrow from the government is on a percentage of the property, and isn't worth a 'set' figure.
This means that when you come to pay the loan off, either by remortgaging, selling the home or settling the debt with savings, you're highly likely to be paying a different amount than you originally borrowed.
For example, if you took out a 20% equity loan of £40,000 on a £200,000 house and it's now worth £250,000, you'll need to pay back 20% of the current value, which is £50,000 - an extra £10,000 on top of what you borrowed.
If your property value drops, you'll pay back less than what you borrowed.
12. Remortgaging with an equity loan can be tricky
For example, most remortgaging deals are only available if you pay off your equity loan, and some products allow you to take on extra borrowing to settle the debt.
Products that allow you to keep the equity loan outstanding are less common, though these can be found by shopping around or taking advice from a broker.
When remortgaging, you'll be charged a fee of £115 by Homes England for the privilege.
If you take the maximum equity loan (in England), you'll owe the government 20% of your property's value.
It's possible to buy out some of this stake through a process called 'staircasing'.
When staircasing, you can purchase chunks of 10% of the property's value. This could be particularly useful if you're buying in London with a 40% equity loan and want to pay off the loan in parts.
When staircasing, you'll need to pay for a valuation plus an administration fee of £200.
By now, you won't be surprised to hear that there are fees involved for settling the loan, too.
First of all, you'll need to pay for a formal valuation of the property from a Rics-accredited valuer.
Then, you'll also need to pay an administration fee of £200 to close the account.
Help to Buy as we know it will soon be confined to the history books, with the government set to overhaul the English scheme from April 2021.
From then, equity loans will only be available to first-time buyers, and the maximum amount you'll be able to spend on a property will be capped according to which region of England you live in.
|Yorkshire & The Humber||£228,100|
|East of England||£407,400|