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, which is available on all properties under £600,000 please read our Help to Buy Mortgage Guarantee Scheme FAQs.
What are the advantages of the Help to Buy scheme?
If you want to move house but cannot quite afford the deposit, the government's Help to Buy scheme could make a big difference.
You get help buying a home
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 are some of the reasons the scheme was introduced.
However, on a more personal level, the fact that the Help to Buy scheme could make it easier for you to get a mortgage so that you can buy or move home without a massive deposit is undoubtedly a good thing.
You get to borrow interest free
Although there are no loan fees due in the first 5 years, the amount you owe can still increase during that time.
Your equity loan will rise and fall with the housing market, so if your house increases in value, so will the amount you owe.
One of the major selling points of the Help to Buy scheme is that you do not 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 of breathing space can certainly be viewed as an advantage.
You will still need to make mortgage payments during this time (which will include interest), but no interest will be added to your Help to Buy loan.
You get access to cheaper mortgage rates
The fact you will need to borrow less overall will mean you are more likely to qualify for a mortgage in the first place.
As you need to borrow a lesser Loan to Value, you are likely to get a more competitive rate of interest than if you simply went for a standard 95% mortgage.
You get a competitive loan rate (after 5 years)
If inflation soars during any 12 month period, you could see a sizeable jump in the rate of interest applied.
After not paying interest on the equity loan for 5 years, the initial rate of interest - 1.75% in the sixth year - is quite generous in the current market.
After the sixth year, the rate of interest will increase by 1% + any increase in the RPI (a measure of inflation).
If the RPI falls at any time your charges will still increase by at least 1%.
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 some limitations to carefully consider.
Your loan will become more and more expensive
Although you will benefit from 5 years without interest, thereafter the rate of interest applied to your loan will increase each year.
While you will only pay 1.75% in your 6th year, each year your loan fee will increase by 1% + any RPI increase.
The creeping cost of fees could be storing up a problem you will 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 is not fixed
The amount you will ultimately need to repay on your Help to Buy equity loan is not fixed. Instead it will fluctuate with the market value of your property because it is 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 is 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.
The Help to Buy mortgage guarantee scheme, however, can be used to buy existing properties.
You can only borrow from certain lenders
Not all providers offer Help to Buy mortgages, and those that do often make them different from their standard mortgage packages. This is because a third party is involved with the purchase of your property, and they 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 need to compare your options and hunt around for the most competitive mortgage deal you can.
You could face the danger of negative equity
Some property experts claim that the Help to Buy scheme has started to inflate house prices.
They are concerned that it is causing a housing bubble that 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 will 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.
You do not know if the terms might change
While you can only plan your finances based information you currently have available, a future government technically 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.
What are the alternatives to Help to Buy?
Before you make a final decision on the Help to Buy scheme, you should compare it with your other options.
These include other ways to get on the ladder with a small deposit or considering renting while you continue to save up.
A recap of the pros & cons
You may be able to buy a home sooner
You can borrow interest free for 5 years
You get a competitive loan rate after that
You get access to cheaper mortgage rates
Your loan will be increasingly expensive
Your loan amount is not fixed
You are limited to new build homes
You can only use certain lenders
Negative equity is a danger
Fees and other terms could change