If you’re thinking of buying a home, you may have heard of the Government’s Help to buy scheme, which provides an interest free loan to people wishing to buy certain new build properties. Here’s everything you need to know.
With ever-rising house prices, buying a new build property can seem an impossible dream at times. You therefore might be surprised to learn that help is available from the government.
Help to Buy is the government’s scheme that offers buyers an equity loan they can use to help to buy a new build home.
The scheme essentially allows buyers to purchase a property with a 5% deposit, and receive a loan for up to 20% of the property value, which will be interest free for 5 years. You must then take out a standard mortgage for the remaining 75%.
In London, the Help to buy maximum equity loan is increased to 40% of the property value.
The Help to Buy equity loan is interest free for the first 5 years. In the 6th year you will be charged 1.75% of the loan. After this, the fees will rise in line with the Retail Price Index (RPI) plus 1% per year.
Here are the Help to buy scheme pros and cons, at a glance.
|You could buy a home sooner.||Your loan will be increasingly expensive.|
|You can buy with a smaller deposit.||Your loan amount isn’t fixed.|
|Interest-free borrowing for five years.||You’re limited to certain new-build homes.|
|After five years, you’ll get a competitive loan rate.||You can only use specific lenders.|
|Access to cheaper mortgage rates.||There’s a risk of negative equity.|
|Fees and other terms can change.|
Read on for more detail, to help you decide if Help to buy is right for you. It’s a big decision and the answer to your question – wondering ‘is Help to Buy worth it?’ – is personal to you.
As explained, with Help to Buy the government gives you an equity loan to help you buy a new-build home.
Before you go too far into the Help to Buy scheme pros and cons, it’s worth knowing that there are Help to Buy rules that govern who can and can’t use the scheme.
You don’t have to be a first-time buyer: it’s for existing homeowners who’d like to move too
Help to Buy limits dictate that properties must cost less than £600,000
With Help to Buy a repayment mortgage must be taken out
You have to buy a new build property which is part of the scheme
Help to Buy cannot be used for second homes
You can’t use it to buy a property to rent out
The Help to Buy equity loan has to be paid off after 25 years. But if you sell up before then, you’ll have to repay it when you sell.
The Help to Buy scheme end date has been extended. It will continue to run from 2021-2023, but with some new rules in place. The scheme will only be available for first-time buyers and there will be regional price caps, based on where you live in England.
It’s worth noting that there are already different schemes in place depending on which part of the UK you live in. There’s:
Help to Buy England
Help to Buy Scotland
Help to Buy Wales.
There’s currently no Help to Buy equity loan scheme in Northern Ireland.
With the Help to Buy Shared Ownership scheme you can buy a share of your home (between 25% and 75% of the home’s value) and pay rent on the remaining share. You can find out more about shared ownership here.
If you’d like to move house but can’t afford the hefty deposit, the government's Help to Buy scheme could make a big difference.
As with any scheme, there are lots of Help to Buy pros and cons. It’s best to learn about the advantages and the pitfalls before you make any decisions. Read on for some of the advantages.
Some of the reasons the scheme was introduced include:
to give thousands of people a foot onto or up the property ladder
to boost the housing market
to shift new build homes
to help the wider economy.
If you want to buy a home, you’ll still need to save for a Help to Buy deposit. But this will only need to be 5% of the price of the house you want to buy.
This is much lower and more manageable than many other mortgage options. It’s likely to mean you can buy a home more quickly, as it won’t take you as long to save up your deposit.
Help to Buy will loan you 20% of the purchase price, or 40% of the purchase price if you live in London. This means your mortgage only needs to be 75% of the purchase price, or 55% of the purchase price if you live in London. If you have a bigger deposit, your mortgage could be for a lower percentage of the purchase house so you could get a lower loan to value.
Our help to buy mortgage guide has more details about how the scheme works.
One of the big selling points of the Help to Buy scheme is that you don’t pay any interest on your loan for the first five years.
For first-time buyers in particular, the first five years can be some of the most financially strenuous. Having a bit of breathing space before you start paying interest can be helpful.
Of course, you’ll still need to make mortgage payments during this time, and these will include interest. But no interest will be added to your Help to Buy loan.
As you’ll be borrowing less overall, you’re more likely to qualify for a mortgage in the first place. Your loan to value will be lower so you’ll be offered a more competitive interest rate than if you simply went for a standard 95% mortgage.
After not paying interest on the equity loan for five years, you’ll pay an initial rate of interest of 1.75% in the sixth year which is competitive.
After the sixth year, the rate of interest increases by 1% – plus any increase in the retail price index (RPI) – which is a measure of inflation. If the RPI falls, your charges will still increase by at least 1%. But be aware that if inflation suddenly soars, you could see a sizeable jump in the rate of interest applied.
If you’re wondering how to pay back a Help to Buy loan, you can buy chunks of 10% of your home’s value in a process known as ‘staircasing’. You’re essentially buying out the Government’s stake. To do this, you’ll pay an admin fee of £200 and you might have to pay for an official valuation, too.
There are plenty of Help to Buy scheme pros and cons and you’ll need to weigh them up before deciding whether to go ahead.
Help to Buy might give you the chance to purchase a new-build home that you otherwise couldn’t afford. But there are some drawbacks you should think carefully about.
Read on for details of some of the pitfalls you could face if you decide to go ahead.
With your monthly payments, you’re not actually paying off your loan – just the fees for having it.
You pay the loan off when you sell the home or when you pay off the mortgage. You pay the equity loan plus a share of the increase in value. Your loan goes up and down with the housing market. So, if your house increases in value, so will the amount you owe.
You’ll benefit from five years interest-free, but after that, the rate of interest applied to your loan increases each year.
You’ll only pay 1.75% in your sixth year, but then your Help to Buy fees will increase by 1% –plus any RPI increase – each year.
This creeping cost of fees might be seen as you storing up a problem you’ll be forced to deal with further down the line.
If the RPI increases dramatically, so could the rate of interest applied to your loan.
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.
The Help to Buy properties scheme is only available on new build properties. This isn’t ideal if you love older homes, or if you were hoping to get a good deal on an older property.
It’s also only offered by certain developers, so your choice of property and location will be limited too.
Some people believe you pay a premium for buying a brand-new home, so it might be worth looking at other options unless your heart’s set on a new property.
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.
Mortgage rates available through Help to Buy are better than their 90%-95% mortgage equivalents. But you should still compare options. It’s a good idea to hunt around for the most competitive mortgage deal you can find.
Remortgaging can also be tricky, as many remortgaging deals are only for people who have paid off their equity loan. You’ll also be charged £115 for remortgaging.
Some property experts who’ve been analysing Help to Buy pros and cons believe the scheme has started to inflate house prices.
They’re concerned that it’s causing a housing bubble that will burst when the scheme ends, trapping many buyers in negative equity.
If you’re buying a new home as an investment, and you’re hoping to move in the short to mid-term, this could be a problem. But if you are planning on living in the property for many years, this will be less of an issue.
You can only plan your finances based on information you currently have available to you. But if a future government reviewed and changed the terms of the scheme, this could be a concern.
Interest rates rise on the loan on 1 April, starting the year after you buy your home. Because interest rates don’t rise exactly a year after you buy your home, this means some buyers get to stay on the lower interest rate for longer than a year. Others will only get to stay on the lower rate for a few months.
Even though you own the property you buy, you still have to pay a £50 fee to apply for permission to make significant home improvements. You also have to pay £50 to apply for permission to let it out.
Make sure you don’t take any money out of your Help to Buy ISA when you’re ready to buy a home. It has to be paid directly to your property conveyancer from the ISA provider. You close your account and receive a closing statement, which you give to your conveyancer. They then apply for the bonus for you – although they may charge you up to £50 plus VAT for this.
In Scotland, you can get a 15% Help to Buy loan. It has to be for a new build that’s £200,000 or less.
In Wales, you can get a 20% Help to Buy loan. It has to be for a new build that’s £300,000 or less.
If you’re Armed Forces personnel, you can use a slightly different scheme called Forces Help to Buy. You can borrow up to 50% of your salary (up to £25,000), interest free, to buy your first home or move to another property. You can use it as a deposit or towards legal fees or estate agent fees.
If you’ve been using a Help to Buy ISA to save money so you can buy a home, you’re in line for a 25% bonus from the Government, which is great. But it’s important to note that this bonus doesn’t actually get paid until you complete on a property purchase.
That means it can’t be used for the deposit when you exchange contracts. If you don’t have enough for an exchange deposit, you might be able to negotiate this. Talk to your solicitor.
The Help to Buy ISA scheme has now closed, but it is worth remembering that the Lifetime ISA scheme is still available to first time buyers. You can find out more here.
What are the Help to Buy alternatives? Before you decide if Help to Buy is worth it and put in an application, you should familiarise yourself with all the Help to Buy pros and cons in this article. Then compare it with other options.
There are alternative ways to get onto the property ladder using traditional first time buyer mortgages.
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.