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13 Jun 2019

Three in five people with Help to Buy equity loans didn't need one: NAO

Would a 95% mortgage be a better way to buy a home?

A new report from the National Audit Office (NAO) suggests three in five people who took out a Help to Buy equity loan would have been able to buy a home anyway, even without the government's help. So, is the scheme ineffective - and are there alternatives?

Introduced in April 2013, the Help to Buy Scheme offers buyers an equity loan of 20% (or 45% in London) towards the purchase of a new-build home.

While the new NAO figures only cover loans made between June 2015 and March 2017, the report throws into question how effective the scheme has been at giving home buyers a leg up.

Here, we explain why many people end up using Help to Buy equity loans, why you may be better off going it alone, and what the future holds for the scheme.

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What are the advantages of using the Help to Buy equity loan?

According to the NAO report, just two in five people using the Help to Buy equity loan scheme would have been unable to buy a property without it.

However, the Help to Buy scheme has enabled buyers to purchase bigger properties with more bedrooms, and to buy properties more quickly, than they would have been able to without the equity loan, the report found.

So, while many people could have bought a property without using the loan, it may not have been the kind of home they wanted, or one that met their family's needs.

By borrowing a large chunk of the property's equity, it also means that people with a small 5% deposit can access cheaper rates.

The scheme allows buyers with a 5% deposit to put down 25% equity towards their mortgage (or 45% in London). This means buyers only need a mortgage at a 75% loan-to-value ratio (LTV), rather than 95% - which will almost always mean lower interest rates.

The Ministry of Housing, Communities and Local Government (MHCLG), the government department that introduced the scheme, has said it considers buyers moving up the property ladder more quickly as a positive outcome.

What effect has Help to Buy had on the housing market?

According to the NAO report, more than a third of all new-build property sales have been supported by loans through the scheme, which equates to 4% of all property purchases.

The scheme has also dramatically increased the number of new-build property sales, which ballooned from 61,357 in 2012-13 to 104,245 in 2017-18 - an increase of 70%.

Should you get a Help to Buy equity loan?

Before opting for a Help to Buy equity loan, there are a number of factors you should consider. Indeed, you may find you're better off buying with a 5% deposit, or saving up a little longer.

95% mortgages are getting cheaper

The NAO report says that there is less need for the scheme now that more mortgages with competitive rates are available at higher LTVs, especially at 95%.

These mortgages would require you to put down a 5% deposit - the same amount as the Help to Buy equity loan scheme.

According to data from Moneyfacts, the number of 95% LTV products have been steadily increasing over the past 10 years, with more providers coming into this market.

As the table shows, the past year alone has seen 92 additional fixed-rate products on offer. As a result the average two-year rates dropped by 0.73%, while five-year rates dropped by 0.71%.

Number of fixed-rate productsNumber of providersAverage two-year fixed rate (95% LTV)Average five-year fixed rate (95% LTV)
April 2019338603.28%3.73%
April 2018246534.01%4.44%
April 2014153475.31%5.48%
April 200933n/a7.09%

Source: Moneyfacts

However, it's worth noting that you'll still pay more interest on a 95% mortgage than a 75% deal, so your monthly payments would likely be higher - at least for the first five years, while the Help to Buy loan is still interest-free.

You'll need to pay back the equity loan

While the equity loan is interest-free for the first five years, costs can ramp up fast from the sixth year. You'll need to pay both your monthly mortgage payments and interest on your equity loan - and the interest rate will increase by RPI plus 1% each year.

Many people try to pay back the loan after five years, either by saving up the cash or remortgaging their existing loan to unlock equity.

But finding a remortgaging deal to cover the loan can also be challenging, as few lenders offer them.

Keep in mind you'll also need to pay back the percentage of your home's current value, not the amount you originally borrowed.

You could pay more for a new-build home

Choosing a 95% LTV mortgage over the Help to Buy equity loan means you won't be restricted to new-build properties, and can buy existing properties instead.

Buyers may find that older homes are cheaper than new-builds - though they may require more up-keep and repairs.

When we compared the median prices people paid using Help to Buy with the overall house price figures for England, there was a gap of around 25% - suggesting buyers using the loan do tend to opt for more expensive homes.

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

While new-build homes come with a 10-year NHBC guarantee warranty covering structural defects and tend to be high-spec, you may pay a premium to be the first owner, and face snagging issues when you first move in. And if construction is delayed, you may also need to wait a little longer to move in.

Both options come with a danger of negative equity

For both the Help to Buy equity loan and a 95% mortgage, you'll only own 5% of the property when you first buy it.

If prices fall, you may be in danger of slipping into negative equity, meaning you've borrowed more money than the property is worth.

This is a particular worry at the moment, as the UK is experiencing a slow-down in property growth. Indeed, some areas are seeing prices level off and fall. For this reason, it's best to have as large a buffer as possible.

Saving for longer for a 10% deposit means you're much less likely to experience negative equity. What's more, 90% mortgage rates are still significantly cheaper than deals at 95% LTV.

Help to Buy is changing from April 2021

Commenting on the report, the head of the NAO Gareth Davies said: 'The government's greatest challenge now is to wean the property market off the scheme with as little impact as possible.'

The government's will be doing this from April 2021, when Help to Buy as we know it will be changing.

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, depending on which region of England you're buying in.

These changes will address some of the criticisms of the scheme, including that those on high incomes are able to benefit - although the new price caps have also been criticised as insufficient in some areas.

At the time of writing, the proposed price caps are as follows:

RegionPrice cap
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