Could Help to Buy turn your dream of buying a home into a reality?

By Natasha Culzac
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Want to know how the government can help you get on the property ladder? Read how Help to Buy could benefit you.

These days it seems that financially well-endowed and super-generous parents are a prerequisite for getting on the housing ladder. Without that help, saving up the tens of thousands of pounds needed for a deposit feels like an impossible task. Which is why the government introduced schemes to help struggling first time buyers get their mitts on a property.

What is Help to Buy when it’s at home? (err, pun very much intended)

A Help to Buy Equity Loan is a loan from the government to cover up to 20%* of the cost of a new home. You are only required to put up a 5% cash deposit, and then take out a normal mortgage for the remaining 75%. (*This can rise to 40% for homes in London, to account for the ridiculousness that is the city’s inflated property market.)

There was an additional scheme also under the Help to Buy umbrella called Mortgage Guarantee, in which the government basically acted like a guarantor for your mortgage should anything go awry. It meant that lenders felt a bit better about approving 95% mortgages and the like. Unfortunately it’s been chucked on the scrap heap and was discontinued on 31 December 2016.

Equity Loans: What’s in it for me?

You can shave years off the time it’d take you get a bigger deposit together. If you have the credentials needed for a mortgage – a good credit score and proof of a decent salary – an equity loan should, in theory, make it a hell of a lot easier for you to take that first bricks n’ mortar step. You will repay this loan in full when you sell your house. If, by some miracle you can repay it within the first five years, it will be interest free! Interest on the equity loan is only applied in your sixth year of having it and you will have to make these interest payments alongside your mortgage.

Equity Loans: What does the government get out of it?

The government will get its initial investment back, plus 20% of any future equity you get – that’s the increase in the value of the property over the time you’ve owned it.

So for example, say you bought a house for £100,000 (god knows where, mind).

Government’s equity loan of 20%: £20,000

Your 5% deposit: £5,000

Mortgage for the 75% leftover: £75,000

Total = £100,000

Then say, in six years’ time, the house has gone up in value to £150,000 (wohoo!) - this is a 50% increase. You have to not only pay the government back its initial investment of £20,000 but also their share of the increase. So 20% of the additional £50,000 is £10,000, making your total repayment to the treasury £30,000.

In your sixth year of having the loan, interest is charged at 1.75% and after that the fees are pegged to the Retail Prices Index (RPI) plus 1% each year.

What’s the small print?

The property has to be a new build, sadly, and not some quaint thatched cottage in the countryside, which seems a bit unfair but there we go.

Your mortgage must not be interest-only, but must be a repayment one with both interest and capital repaid.

You are not eligible if you plan on renting it out or it’s for a second home.

There is a cap for the total price of the home. In England, the maximum the property can cost is £600,000 and in Wales it’s £300,000. Scotland has its own rules.

Critics of the scheme argue that it’s unfair you pay for any and all improvements to the property – especially those which increase its value – and yet you’ll only ever own 80% of the resultant hard-earned equity.

I’ve heard of Shared Ownership - what’s that?

This is where you take out a mortgage on anything between 25% and 75% of a new housing association property and pay rent to the same association on the rest.

Your household must earn less than £80,000 (or £90,000 in London) and properties must always be leasehold.

What’s this Help to Buy ISA I keep hearing people bang on about?

If you’re saving for a deposit on a house, the government pledges to top up your final balance by a fabulous 25%. The maximum it will add is £3,000 (on a savings pot of £12,000). Beware that you only get the bonus upon completion of the home’s sale to you.

More information

Government website: Help to Buy Equity Loans

Government website: Shared Ownership

HomeOwners Alliance: Equity Loans

MoneySavingExpert: Help to Buy ISAs

Top Takeaway

Thinking of buying a property in the near future? It might be time to make use of these schemes targeted at first time buyers on low to medium incomes. Unfortunately with today’s fragile economic climate none of these schemes are secure and the government can wipe them out on a whim. Make sure you do your research and get yourself in a good position to keep up mortgage repayments.

 

By Natasha Culzac

Thanks to a journalistic career history and a childhood at Sylvia Young Theatre School, Natasha has her fingers in a few professional pies, doing her best impression of a model and actor as well as personal finance writer. Outside of work she compulsively watches BBC period dramas and constantly lies to herself that this year will be the year she learns French, once and for all.

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Representative example for a loan of £4,000 for 24 months at an interest rate of 15.5% APR fixed. In this example the total amount payable (including interest and fees) would be £4633.57 and your monthly repayments would be £193.07.

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