Help to Buy is a government scheme which was introduced to offer help to first time home buyers purchase a property. This was brought about by offering government loans which were more attainable, such as by offering deposit requirements of a mere 5%. The reason for the introduction of Help to Buy was in wake of the rise in housing prices and the Government had aimed to assist those who could afford mortgage repayments, but could not raise the required deposit, to get on the housing ladder.
Initially, the Help to Buy scheme was offered to both new and existing home buyers. In October 2013, the Government introduced a scheme of Help to Buy known as the mortgage guarantee scheme which applied to homes up to a value of £600,000. Under this system, borrowers across the whole of the UK could put down a deposit of as little as 5% of the property price. The government would then provide a guarantee to the mortgage lender for up to a further 15%, which provided banks and building societies the peace of mind to lend larger mortgages and, hopefully, at lower rates than would otherwise be attached them. This scheme had a huge impact on encouraging lenders to offer improved terms to buyers with a small deposit, which helped lead to its closure in December 2016.
Following the closure of the mortgage guarantee scheme, there are no longer Help to Buy schemes which are offered to both new and existing homes, but only the Help to Buy Equity Loan which was the first scheme to be introduced in April 2013. It is available to both first-timer buyers and those moving homes – but is restricted to newly-built homes. The Government’s Equity Loan part of Help to Buy only applies to properties worth up to
£600,000. Unlike previous schemes, there is no maximum income requirement, but the property purchased must be your only residence. The Help to Buy Equity Loan in not available to purchase a buy-to-let property.
Under the Equity Loan scheme, the buyer is only required to raise 5% of the property value as a deposit. The government will provide a further loan of up to 20% through the Homes and Communities Agency, which, with a combined deposit of up to 25%, will attract more favourable rates from lenders participating in the scheme who provide the remaining 75%. Along with this, the loan must be repaid within 25 years or when you sell your house, whichever is earliest, but the amount paid is dependent on the market value at the time and therefore it could result in more being paid back then what was borrowed.
However, it’s the cost of the government’s 20% portion of the loan that’s really competitively-priced. For the first five years, the loan is interest-free. In year six, you will be charged 1.75% which will climb at a rate of 1% of that figure every year thereafter. The only downside is that the rate of interest is measured using the less favourable Retail Price Index which, taking the 2009 financial crisis aside, climbs at a higher rate on average than the Consumer Price Index.
Furthermore, borrowers can choose to repay the Equity Loan at any time, without penalty. You can pay back either 10% or 20% of the total amount, so long as the loan is worth at least 10% of the value of your home. If you don’t repay the Equity Loan while you are still living in the property, when you come to sell it, the government will reclaim its 20% stake in your home at its current value. As mentioned, if house prices have gone up considerably, this could prove to be expensive.
Whilst the introduction of Help to Buy has proved successful, with over 80,000 completions, the scheme has proven to be less successful in London, which is understandable given the higher house prices. However, there have been concerns as to the schemes economic sustainability with housing market commentators warning that, once these schemes are removed, the economic hangover may be severe. Furthermore, it has been suggested that, whilst the Help to Buy scheme has helped current struggling home buyers get on the property ladder, it may in the future have the effect of merely further increasing house prices. Thus it has been suggested to scrap the Help to Buy initiative and begin to focus entirely on building genuinely affordable new homes.
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