Is Help to Buy the best option for first-time buyers?

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.