The Help to Buy Equity Loan scheme has been available since 2013 and yet many people are still unfamiliar with it. In short, it is a loan from the government worth up to 20% of the property’s value (up to £600,000) to help people get on, or move up the ladder.
My girlfriend and I completed on the purchase of a property using the HTB scheme in March 2020 so I have first-hand experience of the application process and living in a new-build home. What follows is a summary of the extensive research I conducted prior to deciding to purchase a property using Help to Buy. I will start with some FAQs about the scheme…
Who can use the Help to Buy Scheme?
At the time of writing, the scheme can be used by both first-time buyers and existing homeowners wishing to move home (the latter will be excluded from the scheme in April 2021).
Is Help to Buy compatible with the LISA?
Yes. The HTB equity loan scheme is compatible with the Lifetime ISA or the Help to Buy ISA (if you registered for one of those before the deadline).
In short, the main benefits of the scheme are:
- you only need a 5% deposit
- it decreases your loan to value ratio
- the loan is interest-free for 5 years
This means it’s ideal for people who don’t have much saved for a deposit. At the same time, the lower LTV that you benefit from when putting down a 25% deposit (5% from you 20% from the government) will get you a cheaper interest rate on your mortgage. For example, in our case, we got a 1.5% interest 2-year fixed-rate mortgage. This means your monthly mortgage repayments could be quite low, depending on what mortgage term you have opted for (25-35 years being typical).
Finally, it is quite rare in life to have the opportunity to receive a large loan that is interest-free for as long a period as 5 years! What happens after year 5 is nonetheless worth considering if you have not moved from the property by this point.
The main drawbacks to consider include:
- it is only available on new properties
- the size of the loan will increase if your property goes up in value
- it can be difficult to remortgage whilst the government loan remains outstanding
Let’s drill into each of these in more detail…
Help to Buy- only available on new properties
Let’s dive into each of these. In my view, the first is biggest drawback. As much as it is nice to move into a property where everything is new, the thought can be better than the reality. It has been reported that 98% of all new builds have defects. This puts a major question mark over the general build quality of new housing developments. To mitigate this risk, I’d advise:
- researching the developer. Bovis Homes, for example, appear to have an awful reputation
- organise for snagging survey to be carried out between exchange of contracts and completion whereby all defects will be listed and you can demand the developer correct these within a certain timescale
The Help to Buy loan may increase
Regarding the loan increasing, well no one ever buys a property hoping it will go down in value. However, some say there is a premium you pay for a brand new home. Think of it like this, when you eventually sell on your new build, the second owner won’t benefit from everything being glossy and new and so they might not be as taken with the property as you were. So, personally, I don’t think there’s much of a risk that your new build will dramatically increase in value during your first 5 year years of ownership. This interest-free period of the loan when you may wish to “staircase” to own 100% of the property.
It can be difficult to remortgage
The ability to remortgage is important for those who purchase via the Help to Buy Scheme. For those still living at the property 5 years after purchasing it, they will want to avoid starting to pay interest on their government loan. If you only had a 5% deposit when you purchased the property, attempting to save an additional 20% over 5 years could be quite an ambitious target. Of course, this depends on how much you earn and the value of the property you purchased. This means you may need to remortgage your property. The good news is that lenders are starting to make it easier for those with outstanding HTB loans to repurchase.
For me, the pros of the scheme far outweigh the cons. The question is more about whether a new build is right for you or whether you’d prefer to buy an older property (which may be built to a better standard). If you’ve decided you’re comfortable with buying a new build sold by a developer who supports the Help to Buy scheme, then it’s a bit of a no-brainer to make use of it- providing you have a plan for how to pay off the loan once the 5 year interest-free period has passed.