Looking at Help to Buy as the scheme turns 5 years old

Posted by Mark Lloyd, Property Mastery Academy on 30 June 2018 | Comments

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Launched in April 2013, the Help to Buy scheme was created to help those with small deposits to buy a new home.

The scheme, which is set to run until 2021, is now five years old and many buyers who signed up for it in the early years will start being charged interest on their loans.

help to buy isaWhat is Help to Buy?

The scheme is available for new-build properties costing £600,000 or less, and buyers are only required to put down a 5% deposit. The government lends a further 20% of the property price interest-free for the first five years. Therefore, buyers only need a mortgage for the remaining 75%.

How interest is charged

When the five-year interest-free period finishes, interest is charged on the loan at a rate of 1.75%. The interest rate then rises every year by the rate of inflation, as measured by the Retail Price Index (RPI) plus another 1%.

However, when the loan is paid off, the Government is still owed 20% of the sale price, not 20% of the original purchase price.

"It’s not simply a case of seeing whether the borrower can undercut the 1.75% charge with a standard mortgage rate, because the equity loan is repayable at the current market valuation, rather than the original purchase price. So, if the property value has risen, then the equity loan will have increased. For example, a property that was originally purchased for £200,000 with an equity loan of 20% (£40,000) that has risen in value to £230,000 will leave the buyer owing £46,000,” said David Hollingworth, of L&C mortgage brokers.

Options for those with Help to Buy equity loans

There are various options if you’re a homeowner in the scheme. You could stay put and start repaying the interest owed. However, the interest is on the equity loan and does not repay any capital.

You could pay off some or all of the equity loan with the aim of owning the property in full. But before you can do this, you should get an independent valuation carried out because the repayable amount is equivalent to 20% of the current value of the property, not 20% of the original value.

The government will, therefore, take its share of any house price growth, and by the same token, if the property price has fallen dramatically, you could end up paying back a smaller amount than the original loan.

Another option is to sell the property and use the proceeds of the sale to pay back the loan.

Remortgaging the property

You do have the option to remortgage but bear in mind that you’re limited to lenders that offer Help to Buy remortgages, so you won’t have your choice of the mortgage market. As long as the Help to Buy loan is in place, you’re restricted to lenders who support the scheme.

It is possible to remortgage and free up enough capital to pay off the equity loan while remaining in the property. Although this would incur some administration charges, it would give you access to cheaper loans as you’d no longer need a specialist Help to Buy mortgage.

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