For any first time buyers looking to get on the property ladder, recent events have been making that more difficult than ever. The Government’s Help to Buy scheme aims to enable millions of people to purchase their first home. This guide will tell you everything you need to know.
Why are times so hard for first time buyers?
To set the scene, we will look at the struggles facing first-time buyers. Even if using mortgage advisors or mortgage brokers, young people are finding it harder than ever to be property owners.
In recent years, house prices have soared. This was already happening before the pandemic, but the stamp duty holiday offered during Covid meant that the property market took off. This has not stopped in our post-Covid world, and latest stats show that house prices jumped by 15.5% from July 2021 to July 2022.
As a result, the ratio of earnings to house prices is becoming less favourable. First time buyers are paying approximately 6.5 times the average annual wage, which has increased significantly compared to a decade ago, where the multiple was just 5.25.
So house prices have been sky rocketing, whilst earnings have not kept up with the pace. The saving grace in the last decade has been the record low interest rates, meaning that at least the cost of borrowing has been relatively cheap.
Oh no, enter the interest rate increases throughout 2022 (with more expected in 2023), and suddenly it is even expensive to borrow once first time buyers have managed to save a deposit. This means that higher deposits are needed to reduce the value of the mortgage since repayments are so high. First-time buyers are good at saving though, right?
Now factor in the worst cost of living crisis for over 30 years, with inflation soaring past 10% and widely expected to reach the late teens. Rising energy bills, petrol prices and food costs mean that everyone is struggling to get by, let alone save some earnings towards a house deposit.
Clearly, help is needed.
What is the Help to Buy scheme?
This Government backed help to buy scheme provides an equity loan to first time buyers. It offers hope to those who have only saved a small deposit. The equity loan can be used on top of your deposit to reduce the size of mortgage required, and increase your chances of being accepted by a lender.
Please note that the details in this article are relevant to the scheme in England, and different rules apply in Scotland and Wales.
Am I eligible for the Help to Buy scheme?
As with anything, there are restrictions and requirements in place. If you are unsure, please speak to your mortgage broker or mortgage advisor. We offer a comprehensive mortgage advice service and would be happy to help.
Firstly, please note that this scheme will close to new applications on 31st October 2022 at 6pm.
The eligibility criteria are as follows:
- Applicants must be age 18 or over
- Must be first-time buyer
- Able to afford the relevant fees and loan interest payments
- You must never have owned a home or land in the UK or abroad
- You may apply as a single applicant or joint, but all applicants must meet these criteria
What property can I buy with the Help to Buy scheme?
There are strict requirements on the property that you purchase:
- New build properties only
- It must be sold to you by a Help to Buy registered homebuilder
- This must be the only home you own and live in
- Cannot have been lived in by anyone before you buy it
In addition to this, there is a cap on the property purchase price that can be covered by the scheme. These vary depending on the region that the property is situated in.
These caps are:
North East = £186,100
North West = £224,400
Yorkshire and the Humber = £228,100
East Midlands = £261,900
West Midlands = £255,600
East of England = £407,400
London = £600,000
South East = £437,600
South West = £349,000
How does the Help to Buy scheme work?
This is a frequently asked question. If eligible and accepted onto the scheme, you receive:
- Your loan to cover anywhere from 5% to 20% of the purchase price
- For London, this can be up to 40%
As part of this, you are required to pay at least 5% deposit yourself, and take out a repayment mortgage for at least 25% of the property. A mortgage advisor can help you with this.
What interest do I need to pay?
The loan from the help to buy scheme is free of interest for the first 5 years. This means your equity loan is essentially free for 5 years. In the 6th year, your interest begins at 1.75%. Interest is only due on the amount you have taken out as part of the scheme. Your interest on the mortgage will be likely higher and will be charged from the first year following purchase.
Although charged annually, the interest is paid monthly so payments will be across the year.
For example – assume you purchase a property for £150,000 and split the purchase as follows:
House purchase = £150,000
Deposit = £15,000 = 10%
Help to Buy Equity Loan = £30,000 = 20%
Repayment mortgage = £105,000 = 70%
In this case, your interest in the 6th year will be as follows:
- Equity Loan = £30,000
- Interest in 6th year = 1.75% = £525 per year
- Monthly interest payments = £43.75 per month
In the 7th year and beyond, the rate of interest charged increases by CPI plus 2%. This takes effect from April.
What fees are involved with the Help to Buy scheme?
All the normal fees involved with purchasing a home and taking out a mortgage still apply. An idea of these can be found on our first time buyers FAQs page.
In terms of the Help to Buy scheme itself, you will need to pay a monthly management fee of £1. This applies from the start of the loan right up until you pay it off. There will also be administration fees if you remortgage or repay some of the equity loan.
When can I make repayments of the equity loan?
Repayments can be made at any time, but you must get a chartered surveyor to value your home first.
The minimum permitted repayment is 10% of the value of your home. This is 10% of the total value, and not 10% of the equity loan you took out as part of the scheme.
Having paid back some of the loan, your interest payments will then be lower because the interest will be calculated on the outstanding equity loan, rather than the full amount.
When must I pay back all of the equity loan?
Unfortunately, you cannot keep the loan forever, and there comes a time when you must repay the full loan. This happens when one of the below occurs:
- You reach the end of your equity loan term – this is normally 25 years
- Pay off your repayment mortgage
- You sell your home
The amount you pay back after selling your home will be the original percentage that you loaned. This percentage will be applied to the market value or the sale price, whichever is highest.
Following on from the previous example:
House purchase = £150,000
Deposit = £15,000 = 10%
Help to Buy Equity Loan = £30,000 = 20%
Repayment mortgage = £105,000 = 70%
If you were to sell this property for £200,000, you would be required to repay 20% of this amount:
- Repayment of equity loan = 20% of £200,000 (sale price) = £40,000
ALTERNATIVELY – if you have already made a part repayment, the equity percentage that you repaid will be taken off your original loan percentage.
House purchase = £150,000
Deposit = £15,000 = 10%
Help to Buy Equity Loan = £30,000 = 20%
Repayment mortgage = £105,000 = 70%
Assume you have repaid 10% previously, and are now selling the property for £200,000:
- Repayment of equity loan = 20% – 10% = 10% of £200,000 (sale price) = £20,000
How do I apply for the Help to Buy scheme?
Since this only applies to new build homes, you must register with a Help to Buy agent in the area you are looking to purchase your home in.
Visit the gov.uk page on the Help to Buy scheme for more information and links.
Like everything, this scheme has advantages and disadvantages. The main and most obvious positive is that you only need a minimum of 5% deposit, which opens up opportunities for many first time buyers. Furthermore, having the loan means that you can access more competitive mortgage rates. This is because you will need less mortgage compared to the purchase price of your home.
The other main advantage is that you pay no interest for 5 years. For most first time buyers, these are the most difficult years because your salary is still increasing and you have most likely used up your savings purchasing the house plus furniture etc. The 5 year period allows you to take control of your finances again and hopefully be in a better position once the interest begins.
You can pay off the equity loan at any time, which gives a degree of flexibility. If you suddenly come in to some money you can use this immediately and be free of the equity loan.
However, you must be careful because the interest rates from the 6th year onwards can rise very fast. In the current climate, CPI is over 10% so the interest in the 7th year could rise towards 15%. This can start to accelerate quickly so do act with caution.
Another point to highlight is that your repayment amount is based on a percentage rather than a fixed amount. As demonstrated in the example above, this means you will likely repay more than you borrowed if the house price increases before you sell.
A large restriction on this scheme is that it is only available on new build homes. This makes it very restricted in terms of availability. If you have your heart set on a location and there are no new build homes available, you will need to make a compromise on location or timings.
Overall, the help to buy scheme does open some doors for certain people. The chance to get on the property ladder with only a 5% deposit is very appealing. If you meet all the eligibility criteria then this scheme is worth exploring because there are attractive aspects. But be careful because there are dangers as well in regards to high interest rates and possible negative equity. Please speak to a mortgage advisor or mortgage broker before making any final decisions. Our mortgage advice service comes with a free initial chat. We will discuss your situation before making any recommendations.
