Homeownership is a dream of many young people in Britain, but it is a life goal that can take a significant amount of financial planning and resources to make come true. For those yet to step onto the property ladder it can be especially difficult given the rate at which house prices continue to increase in many parts of England.

However, while buying a home is likely to be the biggest investment of many people’s lives, it is not unachievable, and many thousands of people buy their first home each year.

One way they do it is through the Help to Buy scheme, which has been a popular route into homeownership since its launch in 2013. In fact, close to 300,000 properties have been purchased using a Help to Buy Equity loan since it began.

What is Help to Buy?

The Help to Buy Equity Loan is a loan from the Government which can help make it easier for some people to buy their first property. It does this by allowing buyers to step onto the ladder with as little as a 5% deposit and by making it a bit easier to pass the affordability tests put in place when applying for a mortgage. Someone using the scheme can borrow a maximum of 20% (or 40% in London) of the value of their desired home from the Government, meaning they only need to borrow around 75% from a traditional lender.

A buyer purchasing a £200,000 home with Help to Buy would pay:

• A £10,000 deposit
• Then the Government provides a £40,000 equity loan
• Meaning the remaining £150,000 is provided by a normal mortgage lender

The 20% Help to Buy loan is interest free for the first five years but then starts charging interest, meaning borrowers will effectively have two mortgages unless they remortgage onto a new mortgage and repay the help to buy element.

Help to Buy can be helpful for some buyers, however, Government recently introduced changes to the scheme which means anyone using it must be purchasing their first home. If you’re buying as a couple, both people must meet the criteria. Properties bought through Help to Buy must also be new-build and purchased from a homebuilder registered with the scheme. The property value also needs to be within the Government’s regional price caps, which are outlined below.

Are there better ways to step onto the property ladder?

The recent changes to the Help to Buy equity loan have made it more restrictive and limited the types of buyers who can benefit. And, while it will continue to be a good option for some people, the scheme has been criticised for potentially being overly expensive and unnecessarily limiting the types of homes first-time buyers can access. Also, if you use the help to buy scheme then you need to remember that part of the equity growth goes back to the scheme and not to you.

You can read more about the risks of Help to Buy in this blog post Is Help to Buy worth it? 

Fortunately, there are other options…

One alternative is the Government’s new mortgage guarantee scheme. The scheme announced in March 2021 has helped incentivise high street mortgage lenders to offer 95% loan-to-value mortgages. This has boosted the supply of mortgages suitable for buyers with 5% deposits, but while the Government guarantee has helped improve the availability of low-deposit products (a bit like the Help to Buy scheme did), it does not tackle the tough affordability tests applied to mortgage applicants.

Another option for first-time buyers could be a fixed-for-life mortgage. As the name suggests, the interest rate on these mortgages is locked for a much longer period of time than for traditional UK mortgages – which typically have a fixed term of about two or five years. By fixing the interest rate for 30 years or longer, first-time buyers are no longer exposed to potential rate rises, meaning they do not need to pass a stress test to check they can afford the mortgage if interest rates rise. Other affordability criteria remain in place to make sure borrowers and lenders are still protected, but there is altogether more certainty for each party.

What’s great about these mortgages, they keep deposit requirements for first-time buyers as low as 5%, meaning those wanting to buy don’t need to spend decades saving and can instead step onto the ladder sooner. These mortgages could also open the door to buyers in more expensive areas, as a bigger loan size could be accessed than through other products. And, because there is no need to juggle multiple different loans, or select a property that meets the Government’s criteria, these mortgages could provide a much more straightforward route into homeownership for many where the buyer has more market choice.

If a fixed for life mortgage sounds like something that could help you then sign-up to the Perenna waitlist to be the first to hear about when these products become available.

So, you’ve decided to buy a new-build home? Whether you are a first-time buyer or an experienced mover, there are many benefits and potential pitfalls to be aware of when purchasing a newly built property.

Despite the pandemic leading to the temporary closure of the housebuilding sector, 148,630 new homes were completed in 2020 and demand for these properties has been fuelled by a real variety of reasons, including the Government’s Stamp Duty holiday and a national ‘race for space’ which emerged as many people sought to secure additional outdoor and home working space in the wake of the UK’s multiple lockdowns. These factors, along with returning interest from international property buyers and property investors helped to create a housing boom in 2021.

New-build homes are a popular option for many reasons and provide some benefits that simply aren’t available from pre-owned homes. These properties are appealing as they require minimal decoration and often come with new build guarantees. In addition, a new-build home is a blank canvas, with fresh tiling and paintwork for buyers to enjoy immediately after moving in, and energy costs are typically lower. Many buyers also like being the first owners of a property.

Consider these drawbacks

However, there are naturally also drawbacks to consider. The so-called new-build premium means that in some cases buyers can end up paying more for a newly built home than they would for an equivalent older property. Much like buying a new car, there’s also the possibility of the price of a new home falling after purchase. This ‘forecourt’ premium can therefore make it difficult for some homebuyers to get their money back if they try and sell within a couple of years of moving in. However, property prices are inherently linked to and dependant on demand. With both new builds and older properties, their value is dictated by wider market conditions and can go up as well as down.

After you’ve visited your plot and the site’s show home, many new-build developers will also let you specify certain finishings within the build – such as flooring, tiles, and kitchen cabinets etc. While customisation options are appealing, the more upgrades or bespoke fittings you opt for, the longer you may have to wait. With this increased risk of delays with an “off-plan” home, many buyers agree on a long-stop completion date with the house builder. This is where the developer agrees to pay compensation if the construction is delayed beyond a certain date.

What else should buyers look out for?

There are several other areas buyers should keep a close eye on when purchasing a new-build home. These properties typically come with a warranty, but this will usually only cover building defects and structural issues. With new-builds, you can expect snags like unfinished carpets or a missing door hinge, so be prepared to have a snagging survey as soon as the developer allows you on site.

Prospective buyers should also ensure they know whether their property is freehold or leasehold. With the latter, the owner usually pays an annual ground rent to the freeholder. Leases can be as long as 990 years but are typically between 100 and 125. Homeowners can struggle to obtain a mortgage if the lease has less than 70 years left to run. However, there have been proposed changes as Government pledges to end leaseholders’ ground rent payments to their freeholders.

If you are a leaseholder, the freeholder may attach certain conditions to your property, such as requiring that no alterations are made to the property without prior consent. However, leaseholders are fully responsible for any maintenance and building insurance costs. New-build houses should not be sold on a freehold basis, but most homes in flats are sold in this way.

Are you a first-time buyer considering buying a property with Help to Buy but find it difficult to understand what it means for you – the consequences and potential risks? This blog post is for you.

What is attractive about Help to Buy?

Help to Buy offers first-time buyers the chance to buy a new build property with just a 5%deposit. The government supports the loan and provides a 20% loan (up to 40% in London) of the property purchase price to make it attractive for mortgage lenders to support first-time buyers. Mortgage lenders will within the Help to Buy scheme finance the remaining 75% of the home purchase. The government loan is interest-free for the first five years.

By lowering the loan to value (LTV), Help to Buy enables you to access lenders more affordable mortgage rates. These rates typically kick in around 75% LTVs, which are more attractive for lenders due to lower risk.

At first glance, this is an attractive proposition, but remember that the government loan is repayable, and interest starts accruing after the initial 5-year term.

Help to Buy risks to consider

The government will take part in an increase in your home’s value when you remortgage or sell it. Plus, the government loan is not a fixed amount. Instead, it’s a percentage of your home’s value. If your home value increase, so does the debt you owe.

For example, if you bought a home worth £250,000 with a 20% Help to Buy loan. You would owe the government £50,000. If your home has increased in value when the time comes to remortgage or sell your home, you might be liable for a much higher amount. Let’s say the home value over five years has increased by 20% to £300,000. Your Help to Buy debt is now £60,000, £10,000 more than the original debt.

Suddenly, Help to Buy is a costly option compared to a standard mortgage which will never increase based on increasing property prices. The incentive to get on the property ladder early and start building home equity has lost its appeal slightly.

Interest rates can get expensive  

In year six, the loan starts accruing interests. The interest is payable in addition to the lender repayments. The interest on the equity loan will be 1.75%. After that, the rate increases each year by the retail price index (RPI) measure of inflation, plus 1%. This is known as ‘staired’ interest. There is no cap on the interest rate, which means the loan can become expensive to maintain.

Restrictions  

Help to buy is only available if you are buying a new build property, with a purchase price of up to £600,000. Also, you have to be a first-time buyer. This rule applies to all people buying the property not just one of you. The property must also be being sold by a Help to Buy registered builder.

Remortgaging can be difficult  

Remortgaging your Help to Buy loan can be difficult. When assessing your affordability, lenders will look at your obligation to repay the Help to Buy loan as a negative factor. If you cannot repay the government loan, you risk reverting to your lender’s Standard Variable Rate when your fixed rate comes to an end. If this happens, you will have to pay a premium on your mortgage while also paying interest on the Help to Buy loan. This could quickly amount to hundreds of pounds extra cost per month.

To prevent this, before you take out a Help to Buy loan make sure that you can remortgage in the future for the full mortgage plus government loan.

How about an alternative?

Help to buy has been immensely popular and helped over 300,000 people buy a home. It’s easy to understand the appeal of the scheme. A 5% deposit and low monthly payments are difficult to resist for prospective home buyers. But sometimes, things really are too good to be true. You must be aware of the risks of Help to Buy and have a plan to repay the government loan before the five years have passed.

Soon there will be a viable alternative to Help to Buy. Fixed for life mortgages will also allow you to buy a home with only a 5% deposit. The interest rate may be higher for the first five years, but you will own your home in full so any increase in value will all belong to you, and your monthly repayments will remain the same throughout the loan term which will be up to 30 years. Fixing your mortgage for life means you can borrow more as the lender does not have to check if you can afford your mortgage if rates rise significantly, this means you probably don’t need the Help to Buy top-up loan, and your mortgage payments will not increase.

This also leaves you free to remortgage if it is in your interest to do so, not because you have to, all without early repayment charge after five years.

Finally, there are none of the constraints if you use fixed for life mortgages. You can buy any property, as long as it meets the lenders wider criteria. You don’t have to be a first-time buyer, and also any value works. Help to Buy helps but has consequences and has restrictions.

Help to Buy has been a central part of Britain’s new build housing market since 2013. By allowing people to buy with just a 5% deposit, the scheme has helped many to step onto the property ladder and into a new build home.
It’s highly likely it will continue to be a vital route onto the property ladder until 2023, when the scheme is set to end. However, if you’re a buyer planning to use Help to Buy, there are some things you need to consider before starting an application – especially as it’s set to see some dramatic changes in June this year.

How Help to Buy works

Help to Buy provides a ‘top up’ equity loan from the Government that can be put towards purchasing a new build home. This loan is interest-free for the first five years and can cover up to 20% of the purchase price (or 40% for properties in London). This helps reduce the deposit amount needed – in many cases dropping it to just 5% – as buyers only need to secure around 80% of the value of the desired property from a mortgage lender rather than the full 95%.

Therefore, the purchase of a home with Help to Buy could look like this:

• A 5% deposit from you
• A 20%‘top up’ equity loan from the Government
• A 75% Help to Buy mortgage (provided by a mortgage lender)

So, for a home costing £200,000:

• You’ll pay a £10,000 deposit
• You can get a £40,000 equity loan
• You’ll need a mortgage of £150,000

Don’t overlook the fine prints

It’s important to remember that after five years, you’ll have to start making repayments on your Help to Buy equity loan. However, these payments are interest only and you will still owe the outstanding loan amount, which must be paid off in full either by the end of the loan term, when you pay off your repayment mortgage or when you sell your home. You also give up some of the growth in the property value against the equity loan.

When and why is Help to Buy changing?

Up until December 15th  2020, the Help to Buy scheme was open to anyone looking to purchase a new-build property. However, this has now changed.

Anyone applying under the current version of the scheme must be purchasing their first home. And if you’re buying as a couple, that means both buyers can’t have owned property in the UK, previously.

This isn’t the only change, though. Buyers using the scheme will also now have to adhere to new regional price caps:

How to apply for the new Help to Buy scheme?

Before getting started with securing a Help to Buy mortgage, you’ll need to make sure you can afford to pay:

• A fee to reserve your home (no more than £500)
• Your deposit for the mortgage
• Other fees on completion (such as any Stamp Duty, legal fees or other mortgage costs)

Once you’ve got these fees together, you’ll need to find a new build property that fits the Help to Buy criteria and pay the reservation fee.

As soon as you’ve reserved your dream home, you’ll then need to work with a Help to Buy agent who will help you apply for the loan. Normally, this will be your mortgage adviser. If you pass the mortgage and Help to Buy buyer affordability criteria, you will go through the government’s buying process.

The process from there has three steps:

• Authority to proceed – your eligibility for Help to Buy is checked and if approved you’ll be given an ‘Authority to Proceed’ which is valid for three months. This can be used to apply for a repayment mortgage;
• Mortgage offer and exchange of contracts – now you can sign the property sale contract and the Help to Buy equity loan contract. Once this is confirmed pay your deposit and will be legally bound to buy your new home; and
• Completing the purchase – in this final stage you’ll complete the purchase and confirm the sale with the Help to Buy agent via your conveyancer.

Can I still remortgage if I applied through the old scheme?

The most popular Help to Buy mortgages are those with two- or five-year fixed rate deals. This means at the end of your fixed period you’ll need to remortgage to avoid being moved onto your lender’s standard variable rate, which is likely to be more expensive than your fixed rate. Unfortunately, many lenders do not offer Help to Buy remortgaging deals and those that do often require borrowers to pay off the Help to Buy equity loan in full. This can be a challenge with many first-time buyers who might struggle to raise the funds to pay off the Help to Buy equity loan plus the accrued interest.

If you’re able to find a Help to Buy remortgage deal, you’ll need to notify the Homes and Communities Agency (HCA) and in some cases the developer to get consent to enter into remortgage. The remortgage may need to meet certain criteria and you’ll have to share certain documents and possibly pay some administrative fees.

What’s happening to the Help to Buy scheme after 2023?

Help to buy is set to end in 2023, but the Government recently announced a new mortgage guarantee scheme that will help to ensure 95% mortgages remain available, keeping the deposit burden for many first-time buyers at a minimum. That said, buyers still need to pass the affordability test, which can often be an even bigger barrier than saving a deposit amount.

Consider a 30-year fixed rate mortgage instead of Help to Buy

When we’re live, Perenna will be a solid alternative to Help to Buy. We’ll address the deposit and affordability challenges by offering fixed-for-life mortgages. Due to the interest rate being fixed for 30 years, we can provide you with a guarantee for monthly payments and offer loans up to 6 x household income. This approach will make it possible for many more aspiring homeowners to step into the first home they really want. We believe borrowers should not have to worry about future interest rates, except if they come down and with a Perenna mortgage you can move to a better deal after five years without early redemption charges.

Help to Buy has backed more than a quarter of a million house purchases since it launched in 2013.1 The Government-backed equity scheme, which provides a 20% top-up loan (or 40% in London), has helped many buyers to step into a new build property and often with just a 5% deposit.

Yet, Help to Buy is soon set to change and those intending to use the scheme might now find that they want to look to an alternative.

What’s happening to Help to Buy?

From April 1st, Help to Buy will be restricted to first-time buyers only. To qualify for the scheme, you must be buying your first home, so for the thousands of second steppers who currently account for 18% Help to Buy users, this means they can no longer benefit from Help to Buy.

These are not the only changes to Help to Buy though. Even if you still qualify as a first-time buyer, new regional price caps could also put your dream property beyond reach. In many areas of the country, these caps are lower than the average house price, so if you’re looking to buy in a city like York or Cambridge, you might find it difficult to find a place that qualifies for Help to Buy.

In just two years’ time the scheme itself will also come to an end. So, if you’re looking to step into a property but don’t have a large enough deposit, what are your choices?

What’s the alternative?

Long-term fixed-rate mortgages could soon offer an alternative route for borrowers to purchase the home of their dreams.

At Perenna, we’re planning to launch a 30-year fixed-rate mortgage that allows buyers to step onto and up the housing ladder with as little as a 5% deposit. With a rate we call ‘flexible fixed for life’, there are no shock increases in repayments. By contrast, the Government’s Help to Buy scheme is an equity loan that you must start paying back after five years and that means your monthly outgoings could rise significantly. Also, do you really want to share the equity you have in your home with your lender, Perenna will not take a share of your equity.

As well as avoiding those higher repayments, customers taking out long term loans will be able to buy without being subject to the strictest mortgage affordability tests on variable rate or short-term fixed-rate mortgages that have blocked many young people from buying a home. For two- or three-year fixed-rate loans, borrowers are required to show they can afford to pay back their mortgage if rates were much higher (usually at lender’s standard variable rate plus 3%) but a long-term fix gives homeowners certainty over their repayments for years to come. This means such stringent stress tests are not necessary.

A mortgage for you

With a Perenna long-term fixed-rate mortgage you won’t suffer from the same restrictions in place with schemes like Help to Buy. While Help to Buy has proved a suitable route for thousands of buyers onto the ladder, it’s focused solely on new build properties. This restricts the choice available to buyers with smaller deposits, but with long-term fixed-rates offered by Perenna, borrowers can use their mortgage to fund the purchase of older properties too, just as long as it’s your primary residence. This could be a vital lifeline if you’re looking to buy in smaller towns or villages where there are fewer new-build properties to choose from. If you or your other half has or currently own another property, you can still buy that dream home – our mortgages won’t be restricted to first-time buyers either.

Alongside this, some users of Help to Buy are also already finding it challenging to find lenders that are willing to help them remortgage. Our long-term fixed-rates will have built in flexibility too. Perenna’s products will be fully portable, so you can take them with you when you move, and with early repayment charges for just the first five years, it’s fully possible to switch if a better rate becomes available.

Whether you have fallen outside the Help to Buy scheme rules or are just looking for another option, long-term mortgages will soon be a viable alternative for all borrowers. If that’s a mortgage that sounds like it could meet your housing needs, sign up to our waitlist to be the first to hear more.