Help to Buy or not Help to Buy: that is the question

With any form of loan, it’s important that you ascertain whether it’s going to be beneficial to you before taking any steps to secure one.

The scheme’s introduction

The help to buy scheme was introduced by the previous conservative government to help those struggling to raise large deposit monies to purchase their first property or even to help you move. The scheme was originally launched three months earlier than scheduled so not all banks and building societies came on board immediately, but it didn’t take long.

First there were two schemes, the equity loan scheme which we’ll focus on here as it still remains, and the ‘mortgage guarantee’ scheme which effectively gave mortgage lenders a safety net to allow them to offer 95% mortgages again – which had been largely out of the market since the credit crunch. The latter scheme was withdrawn last year but 95% mortgages are still around.

The equity loan has allowed many to get on, or move up, the housing ladder. Anyone can apply so long as they will only hold one property at the time of purchase completion and the property purchase price is under £600k but they are only available on specified newly built properties.

How does it work?

Well, you need a 5% deposit from your own funds and you are then assessed by the local help to buy office to see if you are eligible. Just as with applying for a mortgage, your financial situation is assessed and a decision is made; this usually takes no more than a week or so. If you are approved, you are loaned up to 20% (or 40% in London boroughs) and no repayments need to be made for the first five years. We will look at what happens after that, in a moment.

So you’ve picked your property and applied for the equity loan but you still need to arrange a mortgage for the lion’s share of the money to purchase the property. Mortgage lenders offer specific help to buy products but you still need to meet their criteria to get the mortgage – your mortgage broker or financial adviser will help guide you through this process. As with any purchase you will need a solicitor, preferably one with help to buy experience; the developer may have one they recommend. And remember, you’ll need money aside to pay stamp duty tax when you move if your property costs more than £125k; this is graded according to the purchase price.

So, the scheme has helped you move to your new home and you’ve enjoyed the benefits for five years with no fees, then what happens? Year 6 sees you pay 1.75% interest on the loan, and from year 7 onwards, you pay 1.75% interest plus RPI plus 1%. You’ll want to note that these fees don’t go towards paying off the government loan.

When you either sell your home, or pay the mortgage off, you have to repay the equity loan plus a share of any increase in its value. You are able to use any remaining equity as a deposit on your next home. The exact sum will depend on how much you’ve paid off your mortgage. At any time, you are able to pay back some or all of your loan. The minimum percentage you are able to pay back is 10% of the market value of your home. And the amount you pay will be dictated by the market value at the time.

April 2018