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What are the pros and cons of the Help to Buy scheme?

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Written by Martin Lane, Managing Editor

27 December 2018

The Help to Buy scheme has been under the spotlight in recent months, with stories of happy new homeowners balanced with accusations that the scheme is distorting the housing market. But importantly, can it help you buy?

Pros & cons of Help to Buy scheme

Pros

  • You may be able to buy a home sooner

  • You could buy with a smaller deposit

  • You can borrow interest free for five years

  • You get a competitive loan rate after that

  • You get access to cheaper mortgage rates

Cons

  • Your loan will be increasingly expensive

  • Your loan amount is not fixed

  • You are limited to selected new build homes

  • You can only use certain lenders

  • Negative equity is a danger

  • Fees and other terms could change

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.

You need a smaller deposit

You still need to save for a deposit to buy a home through Help to Buy but it is set at a more manageable level of 5%. This is much lower than many other mortgage options meaning you could buy more quickly. Our help to buy mortgage guide has more details about how the scheme works.

You get to borrow interest free

One of the main selling points of the Help to Buy scheme is that you do not pay any interest on your loan during the first five years.

For first time buyers in particular, these first five 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.

Can the amount you owe go up?

Although there are no loan fees due in the first five 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.

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 five years)

After not paying interest on the equity loan for five 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% plus any increase in the retail price index (RPI) which is a measure of inflation.

If the RPI falls at any time your charges will still increase by at least 1%.

Can it increase by more?

If inflation soars during any 12 month period, you could see a sizeable jump in the rate of interest applied.

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 five years without interest, after this time the rate of interest applied to your loan will increase each year.

While you will only pay 1.75% in your sixth year, each year your loan fee will increase by 1% plus 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 limit your choice of home.

It is also only offered by some developers so your choice of property will be limited too.

You may feel that you are paying a premium for buying new, so unless you really want a new property you should consider other options.

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.

What does negative equity mean for me?

You do not know if the terms might change

While you can only plan your finances based on information you currently have available, a future government could review and change the terms of the scheme.

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.

How to get on the property ladder with no deposit

Should I buy a house or keep renting?

Whether you are looking to move up the property ladder, downsize or just relocate we can help you find the right mortgage when you move home.

Compare mortgages

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