I’m Not a Fan of the Help To Buy Scheme

Written by Karen Bryan

coinsstackssquintIf you’re thinking about buying a home you’ve probably heard about the UK Government’s Help To Buy scheme and wondered if this could be a good time to purchase a property.

My advice would be do your sums very carefully before buying a property, regardless of the Help To Buy scheme. Be aware that interest rates on mortgages are currently at an all time low. You need to ensure that you can afford the mortgage repayments when rates do go up.

For assistance in finding the best mortgage for your requirements, it’s worth contacting a mortgage broker, such as FirstMortgage, who will look at the whole market, not just the products offered by the financial institution which employs them.

It’s not guaranteed that the rates of interest on Help To Buy loans will be lower than on standard mortgages. You need to factor in the cost of any mortgage arrangement fees into product comparisons.

It took me a while to understand the Help To Buy scheme, I thought that it was daft to give two different initiatives the same name, it only causes confusion. Here’s my summary and evaluation of Help To Buy.

Help to Buy – Equity Loan

The first Help To Buy Equity Loan scheme, rolled out in April 2013, only applies to new-build properties. It’s open to first time buyers and existing home owners for property up to the value of £600,000, as long as it’ll be your only home. You can borrow up to 20% of the property value, as long as the builder is an approved member of the scheme and you have a minimum 5% deposit. There are no charges on the Help To Buy Equity Loan for the first five years. In year six, you pay 1.75% of the loan value, then an annual charge of 1.75% plus inflation (Retail Price Index) and an additional 1%. You need to repay the Equity Loan at 20% of the sale price, when you sell the property. If you don’t sell you need to repay the loan at the end of the mortgage term.

Help to Buy – Mortgage Guarantee

The second Help Me to Buy Mortgage Guarantee scheme, launched in October 2013, is designed to encourage lenders to approve mortgages to buyers with smaller deposits. It applies to new-build and existing properties, as long as they are not let out, up to the value of £600,000. It appears that you could use it to buy a second home.  As the guarantee is given by the Government to the lender, it’s doesn’t really effect the buyer. The hope is that lenders will be more willing to lend to buyers with smaller deposits, as there is less risk of default to the lender. It’ll be interesting to see if the rates that lenders offer on mortgages of 95% of the value of the property, covered by the Mortgage Guarantee scheme, will be around the level of rates previously offered on mortgages for 80% of the value of the property . I suppose the rates on the 95% mortgage will have to be slightly higher to reflect the cost of the guarantee.

My Thoughts on Help To Buy

  • Personally, I’d prefer to pay as large a deposit as I could afford. This would mean paying a lot less in interest on the mortgage over the period of the loan.
  • I think that the Government should spend the money which is being funnelled into Help To Buy on building more social housing and encoouraging the building of private housing. An increase in the supply of social housing would avoid having to pay so much in Housing Benefit towards putting people up in temporary accomodation. A major  house building programme would provide employment. Increasing housing supply should keep a lid on property prices.
  • Surely with all the problems caused with debt, the Government shouldn’t be spending taxpayer’s money to encourage people to borrow more. I’m fed up with the Government propping up the personal finance industry. The Government should leave mortgage market product pricing to the market, within a sensible regulatory framework.
  • I think that the Government should have excluded second home purchase through the Mortgage Guarantee Scheme, why did they only do this on the Loan Equity scheme?
  • The £600,000 limit seems too high to me. I acknowledge that property in London is much more expensive than in other parts of the country; but I think a limit of £400,000 would be more sensible.
  • If the Help To Buy scheme leads to a significant surge in demand for property, surely this will push up property prices, making homes more unaffordable?