Is the Help to Buy scheme really the best way onto the property ladder? We have broken down what its benefits are and what factors you should consider before using this equity loan.
Equity loan Pros
For the budding first time buyers, many have unashamedly grown to love hearing the words ‘Help to Buy available here’, given that it opens up the possibility of buying a property using only a 5% deposit and government loans of up to 40% of the property price depending where you are in the UK. Essentially, this gives home buyers the opportunity to own all of a new home and only have to initially part with a small amount of capital. The dream!
1. No interest payable for the first 5 years
The equity loan is interest free for the first five years. This gives you the opportunity to organise your finances and hopefully save more money to put towards paying off the equity loan after the 5 years.
NB. Even though no interest is added, the value of the loan will be affected by house prices; the balance therefore would increase if the value of the property does. After five years the loan attracts an interest rate of 1.75% of the total amount. From the sixth year, this will rise annually by the Retail Prices Index (RPI) rate of inflation plus 1%.
PC TIP: Technically speaking you are essentially putting down a 45% deposit ( if you put down 5% and take the full 40% equity loan) therefore, your mortgage repayments will be significantly cheaper. Try and save this extra cash so you can put it towards the equity loan at the end of the 5 year period.
2. Allows you to move quickly and get on the ladder even if you do not have enough for a deposit
In the property market, time is of the essence. The equity loan scheme is an excellent option if you want to get on the property ladder as soon as possible, as of course there is no telling how expensive buying a property would be in years to come, or if the scheme will be pulled before 2021.
It can be a massive aid in keeping the initial costs of property ownership down, with the benefits being mostly felt in the expensive London market.
Don’t forget – To reflect the current property prices in London, the Government have increased the upper limit for the equity loan it gives new homebuyers within Greater London from 20% to 40%.
3. You can pay the loan back early
If you would prefer not having to fork out additional equity payments at the end of the 5 year period, the government have permitted a minimum of 10% of the property’s current market value to be paid back early with no penalty, and of course with no interest if done within the first five years.
This can also be done through remortgaging at the earliest convenience to release you from the conditions of Help To Buy. This is a great option if you would like to hold on to as much future capital growth as possible.
Equity Loan Cons
1. Help To Buy is limited to new build properties
You must also bear in mind that limiting yourself to Help To Buy properties dramatically narrows down available options. Help To Buy is only available on newly built homes from developers that choose to be a part of the scheme. This could make the move more costly, as new houses are generally more expensive than existing properties
It has been alleged that some developers only opt in if sales haven’t been performing as well as anticipated, or allocate Help To Buy availability to the units that they believe would not be appealing to regular buyers and fetch the market price that they would prefer.
2. Government take a share of profits if you sell the property before you pay the loan back.
It is important to remember that you will have to pay a percentage of any equity gained if you sell the property before you have finished repaying the equity loan.
This will be separate from the 1.75% interest that begins after the five years, and will be based on the market value of the property at the time of repayment. So the longer it takes you to pay off the loan, the greater the possibility of paying out tons in equity that you could have pocketed in the future.
3. Negative Equity is also a possibility
So what happens if you want to sell and the value of your property has decreased? This obviously does not make you exempt from paying back the original loan agreed.
As with paying back any mortgage or loan, this could make repayments very difficult if you need to sell. But without much evidence of negative equity occurring on this relatively young scheme, the amount you would be required to repay in the event of a sale can vary.
Written by Emma Oruwariye-Briggs
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.