Help to Buy – beware of some cracks in the structure
The Help to Buy scheme was originally introduced in April 2013. Since then, it has helped nearly 170,000 households onto the property ladder. However, as with any such scheme, over time a few issues have started to emerge which buyers need to be aware of.
Here Claire Wicks, Legal Executive in the Residential Property team at Parnalls Solicitors considers recent research about the Help to Buy scheme, its pros and cons, and what you should look out for.
Help to Buy, how it works
A Help to Buy equity loan from the government could help you fund the purchase of your new home. To qualify for the current scheme, you do not need to be a first-time buyer. The home you are buying must be for your own use. It must be a new build and it must cost less than £600,000. You provide at least a five per cent deposit, and the government lends you up to twenty per cent of the property’s value. The balance of the purchase price is then financed with a mortgage from an approved lender. Slightly different rules apply to properties in London.
You must repay the loan when you sell your home, or after 25 years if later. However, unlike a conventional mortgage, the amount you repay is not a fixed amount. Instead, it reflects the ratio of the loan to the value of the property when you first borrowed. So, if your Help to Buy loan was for 20 per cent of the value of your home when you bought it, you must repay 20 per cent of the price you sell it for.
For example, if you are buying a home for £200,000, you must provide at least a £10,000 deposit yourself. The government will provide up to £40,000 by way of an equity loan, representing 20 per cent of the property’s value, and you fund the balance of £150,000 with a mortgage. If in five years, you sell your home for £250,000. After repaying your mortgage, you are left with £100,000. However, you also have to repay your Help to Buy loan. Instead of repaying the original £40,000, you will have to repay £50,000. This represents 20 per cent of the value of the property when you sell.
The loan is interest free for the first five years, although there is a monthly management fee of £1.00. After five years, you pay an additional fee as interest of 1.75 per cent, which will then rise annually by the Retail Price Index plus one per cent.
Although the principle behind the scheme is very simple, the detail and processes involved can appear complicated. For example, you will need formal confirmation of your eligibility to proceed. Choosing a solicitor who is experienced in these types of equity loan will help you avoid delays and potential pitfalls.
Pros and cons
Over £8.93 billion has been advanced under Help to Buy, and the government considers it a great success. There are certainly several benefits to the scheme:
- if you only have limited savings, and a relatively small deposit, Help to Buy can make it easier to get a mortgage and to buy your own home;
- as you will be borrowing less of the property’s value from your mortgage lender, you may also be able to get a more competitive deal; and
- the initial interest free period can ease financial pressure in the early years of home ownership, when you most need help.
However, the scheme has its critics, and it is important to consider the possible disadvantages:
- Help to Buy only applies to selected new build homes, which tend to sell for a premium over comparable pre-owned homes. In addition, recent research suggests first time buyers using Help to Buy pay on average eight per cent more than those buying new homes independently.
- The amount you must repay depends on the value of your home when you come to sell. This could be good news if property prices go down, but if prices go up then you may have to repay significantly more than you borrowed. This could mean having less cash to fund your next purchase.
- After the initial interest free period has expired, the cost of borrowing will increase. You may end up paying more than you would under a conventional mortgage. Whilst remortgaging remains an option, you may find fewer lenders willing to provide finance if you are buying with a Help to Buy loan.
You should also be aware that the current Help to Buy scheme ends in March 2021. A replacement scheme will be limited to first time buyers and the properties they can buy will then be subject to regional caps.
Help to Buy, getting the right advice
Help to Buy is not right for everyone, and it is important that you consider how suitable the scheme, and any particular property, is for you.
Speak to your solicitor early on, as Help to Buy involves some additional steps in the conveyancing process and they can advise you on any risks.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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