Is Help to Buy worth it?

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.