First time buyers are finding it harder than ever to get on the property ladder. Higher mortgage rates coupled with the rising cost of living and stagnant wages mean first time buyers run the risk of not being able to afford the monthly repayments. Rising fuel costs and soaring inflation mean many are having to dip into savings that had been earmarked as a deposit. Rocketing house prices and the lack of availability of small deposit mortgages make their plight even harder. Quite clearly, first-time buyers are in need of help.
What was the Help to Buy scheme?
The Government’s Help to Buy scheme aimed to help millions of people to buy their first home, by providing an equity loan. Even those who have only a small deposit may have successfully secured a mortgage as the equity loan reduced the size of the mortgage needed. It was only available on new-build houses built by a registered developer and there were regional caps on property purchase prices. The figures are available on the Government website which can be found here. This made it very restrictive and limited buyers to certain locations, meaning they had to compromise. In London, due to higher property prices, 40% loans were available. Elsewhere in England, homebuyers can borrow between five and twenty per cent of the property price.
The equity loan was interest free for the first five years which helped first time buyers to regain control of their finances, having spent all their savings on the deposit and furnishing the house. The typical first-time buyer is young and just starting their career, which means their salary is likely to increase over the five years, putting them in a better financial position in the sixth year when the interest rate kicks in. The payment only covers the interest and not the loan itself. In the sixth year, monthly interest of 1.75% of the equity loan is charged and this rises each subsequent year by CPI plus 2%.
This means that interest rates from the sixth year onwards can rise very fast – CPI is currently over 10%. The equity loan is flexible in that it can be paid off at any time, in full or in part. It must be paid back in full once the house is sold or the mortgage is paid off. Many first-time buyers choose to pay off the equity loan at the end of the first mortgage term, either with personal savings, remortgaging or selling the property. There are many firms who can help manage the process of settling the help to buy loan repayment, such as Sam Conveyancing.
Were there any disadvantages?
One of the main disadvantages was that rather than a fixed amount, the repayment amount was based on a percentage, so if the value of the home increases, you will pay back more than you borrowed. For example, if you originally borrowed 20% and the purchase price was £250,000, the original equity loan amount was £50,000. If you agree to a sale price of £300,000, you will need to pay back 20% of this, which is £60,000.
The deadline for applying for the Help to Buy equity loan was 31st October 2022 and completion must take place by Friday 31st March 2023.
