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7 Sep 2019

Will the latest Help to Buy and shared ownership changes benefit homeowners?

Help to Buy mortgage terms extended as Government plots staircasing reforms

The government has announced tweaks to Help to Buy equity loans and shared ownership schemes, but what benefit will they provide to existing homeowners?

Help to Buy and shared ownership have both proved immensely successful in getting first-time buyers onto the property ladder.

For some homeowners, however, the joys can be short-lived - with interest on equity loans, and high rent and service charges on shared ownership flats leading to spiralling costs.

Now though, the government has announced a couple of changes it says will benefit existing users of the schemes. Here, we assess whether that's really the case.

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Changes to Help to Buy mortgage terms

Since its launch in 2013, more than 210,000 people have bought homes using Help to Buy equity loans in England.

Last week, the government moved to allow Help to Buy users to take out mortgages with terms of up to 35 years, with the rule change coming into effect immediately.

Previously, the maximum mortgage term was 25 years, and the government says this change reflects that the number of first-time buyers taking out deals with terms of more than 30 years has doubled in the last decade.

The changes will only affect Help to Buy users in England. There is no set maximum mortgage term for people using Help to Buy Scotland or Help to Buy Wales.

  • Find out more:get to grips with the basics of Help to Buy.

Remortgaging boost for Help to Buy homeowners

The biggest beneficiaries of this change will be people with existing Help to Buy equity loans who are looking to remortgage at the end of their two or five-year fixed period.

Currently, homeowners with outstanding equity loans can only switch to a deal with a maximum term of 25 years, thus limiting the number of options available to them.

This move is of particular significance for homeowners for whom interest is about to kick in on their equity loan, which happens after five years of ownership.

Currently, many lenders require borrowers to settle the loans before remortgaging, effectively excluding those who don't have enough equity in their homes or sufficient savings to do so.

Now though, lenders will be able to offer longer mortgage terms to people with equity loans. This could encourage providers to introduce more mortgage deals that allow extra borrowing to settle these loans.

Do longer mortgage terms help homebuyers?

While this change is good news for people remortgaging with an outstanding equity loan, questions have been raised over whether it'll help or hinder new buyers buying homes using Help to Buy.

That's because Help to Buy has long come under criticism for inflating the prices of new-build homes and - some say - lining the pockets of developers.

Critics say that allowing buyers to stretch their mortgages beyond 25 years isn't the way to improve affordability for cash-strapped first-time buyers, and will instead simply offer another boost to housebuilders looking to entice more buyers.

The future of Help to Buy

Help to Buy as we know it is set to undergo radical changes in April 2021.

From then, it'll only be available to first-time buyers, and the maximum amount properties can be sold for will be regionally capped.

The caps will be at 1.5 times the average first-time buyer price the government forecasted in autumn 2018. The maximum prices will be 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

Shared ownership: changes to staircasing rules

People who have bought a home using a shared ownership scheme could also be set for a boost, with the government set to review a new 'staircasing' system.

Currently, homeowners using shared ownership can staircase to full ownership by buying 10% chunks of the property, though they need to buy extra shares at the current market value of the property, which could be well in excess of what they originally paid.

The government is now set to allow owners to staircase in increments of just 1%, which it says will make it considerably easier for owners to increase their stakes.

It's unlikely this change will come into force until next year, and it remains to be seen whether buyers will still need to pay for valuations before staircasing, even if they're only adding 1% to their share.

Smaller stakes required under new system

The government cites an example of a family with a 25% stake of a £450,000 property (worth £112,500).

It says that to buy a further 10% of their home, the family will currently need to save at least £45,000, an unrealistic amount for many homeowners.

Instead, buyers would be able to buy 1% at a time for £4,500 under the new plans.

Is staircasing by 1% anything new?

While the government says this announcement is a significant move, some homeowners have long been able to staircase by 1%.

That's because shared ownership schemes are operated by individual housing associations rather than centrally by the government, and some associations have always set their own rules around staircasing.

In 2014, Thames Valley Housing (TVH) launched its Shared Ownership Plus initiative, which allowed homeowners to buy 1% of their home each year at a predetermined price. The cost of buying a share would increase by 3% annually, in line with TVH's predictions of house price inflation.

Is staircasing by 1% a pointless exercise?

You might be wondering whether there's any point in owning 26% rather than 25%, and that's a fair question.

Owning more of the property comes with two benefits. First of all, you'll gain more if the value of the home increases, and secondly, you'll pay less rent as you'll own more of the property outright.

There is an argument, however, that if you have an extra few thousand pounds to spare, you'll only be achieving marginal gains by adding to your share.

For example, you might be better saving this towards a deposit for a new home to help you get out of the cycle of shared ownership in future.

Find out more:learn about how to buy part of a home with our guide on shared ownership.

Should you plan an exit route from these schemes?

Help to Buy equity loans and shared ownership schemes allow people to get on the property ladder, but they can be very expensive in the long run.

Interest kicks in on equity loans after five years of ownership, and using government estimates, we've found that on a £200,000 home this can result in your annual repayments increasing by as much as £700 in year six, and £900 in year 10.

Shared ownership schemes have also faced criticism over costs, too. For example, a 25% share of one apartment listed on the Share to Buy website would require you to pay a total of £1,363 a month - £557 in rent, £130 in service charges and just £676 towards the mortgage.

With this in mind, it's best for Help to Buy and shared ownership homeowners to consider ways they could buy their next home without the help of one of these schemes, be it through taking advantage of low mortgage rates and stagnating house prices elsewhere, or by saving any spare cash to put towards their next home.