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The government Help to Buy mortgage guarantee scheme was first announced in 2013 to help first-time homebuyers take their first steps onto the property ladder. This article will discuss the pros and cons of Help to Buy mortgage investment schemes to help you decide whether or not itās right for you.
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 homeās value, buyers can have a mortgage without saving up a large deposit.Ā Ā
There are currently two schemes within the governmentās Help to Buy initiative.
The Help to Buy scheme is available in England, with separate plans running in Scotland, Wales, and Northern Ireland.
Buyers take out a government equity loan alongside, which typically covers 20% of the homeās 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% of 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 following the Consumer Price Index. The equity loan must then be repaid within 25 years (or earlier upon selling the property).
This scheme is designed to help those who cannot afford a mortgage on the entire property. Instead, you may buy a share of your home (usually between 25% and 75% of the propertyās value) and then pay rent on the remaining share.
To apply for a Help to Buy, you will need to meet the following Help to Buy mortgage criteria:
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 contract 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 by an equity loan administrator until repaid in full.
Letās take a look at some of the main advantages of the program.
The greatest advantage (and arguably the schemeās main selling point) is that first-time buyers can purchase a home with a smaller mortgage and deposit. Before the scheme, saving for a deposit to get a mortgage approved could take years. The scheme allows first-time homeowners to own a home much sooner.
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 to have sufficient financial stability.
Itās important to note, however, that this interest-free period applies to the equity loan only. The remaining mortgage is still subject to interest.
Another great advantage that comes with Help to Buy is the ability to reduce your equity loan as necessary. Homeowners can reduce their debt by paying off a larger portion of their equity loan at once. You can pay anywhere from 10% of the homeās current value to 100% of the equity loan in full, subject to a Ā£200 fee and property valuation. Plus, you wonāt face any interest charges if you pay off your loan within those first five years.
As enticing as some of these perks are, there are some disadvantages regarding Help to Buy loans.
With a Help to Buy loan, the amount you owe fluctuates along with your homeās value. That means if your home goes up in value, you will have to fork out more than the government initially loaned you. However, youāll also be building equity alongside the government.
For example,
if you initially purchased the home for Ā£100,000 and it goes up to Ā£200,000, the government now effectively owns Ā£40,000 (20%) of the property while you own Ā£10,000 (5%). When you sell the property, youāll owe the government Ā£40,000.
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.
Help to Buy is only available on certain new build properties. That means your choices for a home will be limited. 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.
The governmentās Help to Buy scheme offers 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 ācheapā way to buy a property. If you are considering Help to Buy, make sure you run the numbers for the first 5 years and after the 5 years to see if you can continue affording it.
