Note: This guide discusses the pros and cons of the Help to Buy equity loan scheme offered on new homes, for more information on the Help to Buy mortgage guarantee scheme available on all properties under £600,000 please read our Help to Buy Mortgage Guarantee Scheme FAQs.
If you're a frustrated renter, first time buyer or want or need to move house but can't quite afford the deposit, the government Help to Buy scheme could make a big difference.
What are the advantages of the Help to Buy scheme?
You get help buying a home
It's easy to focus on finances alone when evaluating the benefits and drawbacks for using a scheme like Help to Buy but it's worth remembering exactly what Help to Buy can make possible.
Giving thousands of people a foot onto or up the property ladder, boosting the housing market, shifting new build homes and helping the wider economy by giving the construction industry a little push in the right direction are some of the many reasons the government's Help to Buy scheme was introduced in the first place.
However, on a more personal level, the fact that the Help to Buy scheme could make it easier for you to get a mortgage (and one with a more competitive interest rate at that) so that you can buy or move home without a massive deposit is undoubtedly a good thing.
You get to borrow interest free
One of the major selling points of the Help to Buy scheme is that you don't pay any interest on your loan during the first 5 years.
For first time buyers in particular, these first 5 years can be some of the most financially strenuous, so the fact you get a few years' breathing space can certainly be viewed as an advantage.
You'll still need to make mortgage payments during this time inclusive of interest, but no interest will be added to your Help to Buy loan.
However, just because there are no loan fees due in the first 5 years it doesn't mean that the amount you owe won't increase during that time.
Your Help to Buy equity loan will rise and fall with the housing market, so if your house increases in value, so will the amount you owe.
You get a competitive loan rate (after 5 years)
The initial rate of interest applied to your loan - 1.75% in the sixth year - looks quite generous in the current market, especially if you consider that as a low deposit buyer, mortgage rates would ordinarily be much higher.
After the sixth year the rate of interest will increase by 1% + any increase in the RPI (a measure of inflation).
Whilst this may sound reasonable, there is a risk that if inflation soars during any 12 month period you could see a sizeable jump in the rate of interest applied.
Remember if the RPI falls at any time your charges will still increase by at least 1%.
You get access to cheaper mortgage rates
A well-advertised advantage to the Help to Buy scheme is that it will allow you to access cheaper mortgage rates.
The fact you'll need to borrow less overall will mean you're more likely to qualify for a mortgage in the first place and, as you need to borrow a lesser Loan to Value, you're likely to get a more competitive rate of interest than if you simply went for a standard 95% mortgage.
What are the drawbacks for Help to Buy?
Although Help to Buy may give you the opportunity to purchase a new build home that you may not otherwise be able to afford, there are a number of limitations that you should carefully consider before making your decision.
Your loan will become more and more expensive
Although you'll benefit from 5 years' interest free, thereafter the rate of interest applied to your loan will increase each year.
While you'll only pay 1.75% in your 6th year, each year your loan fee will increase by 1% + any RPI increase.
While we all hope to be in a better position financially in the future this isn't always the case and this creeping cost of fees could be storing up a problem you'll be forced to deal with further down the line.
Should RPI increase dramatically, so could the rate of interest applied to your loan.
Your loan isn't fixed
The amount you'll ultimately need to repay on your Help to Buy equity loan isn't fixed. Instead it will fluctuate with the market value of your property because it's percentage-based.
This means that if your house has risen in value you may be eligible to pay significantly more than you originally borrowed.
You can only buy new build properties
Currently the Help to Buy scheme is only available on new properties which will seriously limit your choice of home.
Furthermore, it's only offered by some developers so your choice of property will be somewhat limited.
You may also feel that you are paying a premium for buying new so unless you specifically want a new property you should consider other options.
You can only borrow from certain lenders
While you will need to borrow less to fund your house purchase with Help to Buy you can't simply apply for any mortgage on the market.
At present not all mortgage providers offer mortgages to Help to Buy clients, and when they do they are usually different from their standard mortgage packages. This is because there is essentially a third party involved with the purchase of your property who also have a claim to part of the sale value.
While mortgage rates available through Help to Buy are better than their 90%-95% mortgage equivalents you may find that you are unable to get the best deals.
As ever you need to compare your options and hunt around for the most competitive mortgage deal you can.
You don't get certainty
Although there are no plans to amend the Help to Buy fees or charges in theory at least it's not impossible.
While you can only plan your finances based information you currently have available, a future government could change the terms of the scheme. Whether it would be worth the political ramifications is another matter but there is a risk that it could happen.
You could be setting yourself up for negative equity...
Some property experts are claiming that the Help to Buy scheme has started to inflate house prices.
They're concerned that it's causing a housing bubble which will burst when the scheme ends trapping a vast number of buyers in negative equity.
If you are buying a new home as an investment in the hope you'll be able to move in the short to mid-term this could be an issue - if you are planning on living in the property for many years this will be less of a problem.
What are the alternatives to Help to Buy?
Before you make a final decision regarding the Help to Buy scheme you should compare it with your other options.
Our guide How to Get on the Property Ladder if You've Got No Savings looks at how you can get on the ladder if you're set on buying.
Another option is to rent, or continue renting, while you save up a bigger deposit, our guide Should I Buy a House or Keep Renting weighs up the advantages and disadvantages.