The government Help to Buy mortgage guarantee scheme was first announced in 2013 as a way to help first-time homebuyers take their first steps onto the property ladder. Promising 5% deposits, Help to Buy schemes are certainly enticing but are they worth it? This article will discuss the pros and cons of Help to Buy mortgage investment schemes to help you decide whether or not it’s right for you.
What Is a Help to Buy Scheme?
Help to Buy encompasses a series of government-backed schemes for first-time buyers. The idea is to help first-time homeowners purchase a new-build home. By putting down a small deposit of 5% of the home’s value, buyers can have a smaller mortgage without needing to save up a large deposit.
There are currently two schemes within the government’s Help to Buy initiative:
- Help to Buy Equity Loans
- Help to Buy: Shared Ownership
The Help to Buy scheme is available in England, with separate plans also running in Scotland, Wales, and Northern Ireland.
How Does a Help to Buy Mortgage Work?
The Help to Buy Scheme allows first-time buyers to purchase a new-build home with a small deposit of 5% of the home’s value. Buyers take out a government equity loan alongside, which typically covers 20% of the home’s value, leaving the buyer with a 75% standard mortgage on the property.
The size of the government equity loan is proportional to where you live. For example, in London, 40% loans are available to account for higher property prices. These loans are interest-free for the first five years after purchase. After this, homeowners are charged 1.75%, subject to increases in accordance with the Consumer Price Index. The equity loan must then be repaid within 25 years (or earlier upon selling the property).
Shared Ownership Scheme
The shared ownership scheme is also part of the Help to Buy scheme. This works slightly differently. The scheme is designed to help those who cannot afford a mortgage on an entire property. Instead, you may buy a share of your home (usually between 25% and 75% of the property’s value), and then pay rent on the remaining share.
How to Apply for a Help to Buy Mortgage
To apply for a Help to Buy, you will need to meet the following Help to Buy mortgage criteria:
- You must be 18 or older
- You must be a first-time buyer
- You must not already own a home or land (or be in a cohabiting relationship with someone who does)
- You must not already own a home bought with other people or inherited
- You must not buy a second home
If you meet the above criteria, you may then apply for a Help to Buy mortgage. To do this, you will need to reserve a new build property with a homebuilder registered with the scheme and then apply online via the Help to Buy agent in your particular region who will assess your eligibility and issue authority to proceed.
Once you have the authority to proceed, you may apply for a repayment mortgage and exchange contracts on the property. The Help to Buy agent will then issue authority to exchange on the property.
Finally, once the paperwork is confirmed and the new-build home is built, you will receive a transaction confirmation allowing for legal completion and transfer of funds. The equity loan will then be managed to an equity loan administrator until repaid in full.
Help to Buy – the Pros
Help to Buy offers first-time buyers the opportunity to take their first step onto the property ladder. Let’s take a look at some of the main advantages.
1. You Don’t Need a Large Deposit
The greatest advantage (and arguably the scheme’s main selling point) is that first-time buyers can purchase a home with a small mortgage and deposit. Prior to the scheme, saving for a deposit in order to get a mortgage approved could take years. The scheme gives first-time homeowners the opportunity to own a home much sooner.
2. Five Years Interest-Free
With the Help to Buy scheme, homeowners enjoy a five-year interest-free loan period. This can significantly reduce the financial burden of repaying a loan and mortgage simultaneously. As most first-time buyers are still developing their careers, the idea is to allow them a buffer, after which they will have sufficient financial stability.
It’s important to note, however, that this interest-free period applies to the equity loan only. The remaining mortgage is still subject to interest.
3. Reduce Your Loan When You Want
Another great advantage that comes with Help to Buy is the ability to reduce your loan as necessary. Homeowners can reduce their debts by paying off a larger portion of their loan at once. You can pay anywhere from 10% of the home’s current value to the full loan in full, subject to a £200 fee and property valuation. Plus, if you pay off your full loan within those first five years, you won’t face any interest charges.
Help to Buy—the Cons
As enticing as some of these perks may be, there are some marked disadvantages when it comes to Help to Buy loans.
1. The Amount You Owe Isn’t Fixed
With a Help to Buy loan, the amount you owe fluctuates along with your home’s value. That means if your home goes up in value, you will have to fork out more than the government initially loaned you.
2. Loans Become More Expensive Over Time
Once the 5-year interest-free grace period is over, interest rates will increase in line with RPI, plus 1%. This runs the risk of leaving homeowners with unmanageable repayment plans.
3. Help to Buy is Only Available on New Build Homes
Help to Buy is only available on certain new build properties. That means you’ll be limited in your choice of home. For those who do not want a New Build home, a standard mortgage with a bigger deposit is the only option available at this time. You will also need permission to make any home improvements and major works are unlikely to be approved until the homeowner pays off their equity loan.
4. Negative Equity
Vocal critics of the Help to Buy scheme state that it contributes to house price inflation by causing a property bubble that could burst when the scheme ends in 2023. The fear is that the market value of these properties may fall below the outstanding amount the homeowner is required to repay on their mortgage.
Is it Worth it?
The government’s Help to Buy scheme is offering first-time buyers the opportunity to get a footing on the property ladder without years and years of saving up for a large deposit. However, despite its clear benefits, the scheme is not without its risks. For buyers with the financial assets to manage both mortgage and loan repayments, Help to Buy could be a great option. It is not, however, simply a ‘cheap’ way to buy a property.
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