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What Was The Help To Buy Scheme?
Help to Buy was a government scheme in England that was designed to help first-time home buyers afford the purchase price. It was essentially an equity loan scheme that was available to all new-build homes from developers who registered with the scheme.
The scheme ended on 31 March 2023, with the last applications submitted by 31 October 2022.
Even so, there are similar schemes in Wales, Scotland and Northern Ireland (government- and NGO-based), and the Help to Buy loan scheme may see the light of day again in England in the future.
Currently, the Lifetime ISA scheme is considered a successor to Help to Buy.
How The Help To Buy Scheme Worked
The Scheme allowed first-time home buyers to purchase a new-build home by only putting down a 5% deposit. Although no new applications are allowed, first-time buyers are still benefiting.
The government loan covered some of the house’s value, and the buyer then paid the rest with a repayment mortgage.
The Help to Buy loan reduced the mortgage size, without requiring a bigger deposit.
The actual size of the loan depended on the location of the home buyer. For example, Londoners would get a 40% loan, while other parts of England offered 20% of the home’s purchase price.
You could pay back the loan in part (it must have covered a minimum of 10% of the house’s value) or in full at any time. Once you sold the property, repaid your mortgage, or the loan term ended (usually 25 years), you must have repaid the full amount.
Once the loan was repaid, you no longer had to pay the interest either.
Interest payments
For the first five years, there was no interest charged on the loan.
In the sixth year, you would make monthly payments equivalent to 1.75% of the loan. This interest rate rose equally to the Consumer Price Index (CPI) as well as 2% each year in April. These interest payments only covered the interest on the loan and were not a repayment of the loan itself.
There was also a monthly management fee of £1.
Price caps
There were price caps placed on house prices. The price caps differed between regions as follows:
- East Midlands: £261,900
- East of England: £407,400
- London: £600,000
- North East: £186,100
- North West: £224,400
- South East: £437,600
- South West: £349,000
- West Midlands: £255,600
- Yorkshire and the Humber: £228,100
Help to Buy eligibility criteria
- First-time buyers only (you could not have owned a home abroad, either)
- Were able to pay a 5% deposit
- The value of the property must have been below the regional price cap in the area
- Must have a repayment mortgage
- New-build property which forms part of the scheme
- Could not be applied to houses bought to be rented out
- Buyers must have been over the age of 18
The Advantages And Disadvantages Of Help To Buy
Before determining whether the Help to Buy scheme was worth it, we need to look at the pros and cons of the scheme.
Advantages
1. Requires a 5% deposit
Saving up for a deposit on a house can take many years, but with the Help to Buy scheme, you could purchase a home with a small mortgage and low loan-to-value with just a 5% deposit.
2. Lower mortgage rates
A low loan-to-value (LTV) means you have access to a range of mortgages and low interest rates.
Usually, a 5% deposit would stick you with a 95% LTV mortgage, but with Help to Buy you could access a 20% equity loan, which means you could be looking at 75% LTV mortgages. In London, where the equity loan is 40%, even lower mortgage rates could be accessed.
3. No interest for five years
With the Scheme, interest started only in year six. That means that for five years after purchasing your home, you only had to focus on repaying your mortgage. Just remember, this relates only to the interest of the equity loan repayments and not the mortgage itself.
4. Initial low interest
Once you started paying interest, you were only charged 1.75% on the Help to Buy loan. However, it increased with CPI inflation rates and also 2% each year.
5. Pay back when you can
You could begin repaying the equity loan before the end of the loan term. You could either repay a minimum of 10% of the value of your home or the entire loan amount. If you were fortunate enough to repay the entire loan within the first five years, you would have an interest-free repayment period.
Disadvantages
As good as it sounds, there were also disadvantages associated with the scheme.
1. No fixed amount
Since your loan repayments were attached to the value of your home, the repayment amount may have changed as the housing market fluctuated. If your house increased in value, you had to repay more than what was initially loaned to you.
2. Fast-rising interest rates
Five years may have been interest-free, but from there the rates increased fast. In the sixth year, 1.75% was still reasonable, but from there the increases in accordance with the CPI inflation and 2% each subsequent year could add up quickly.
3. Not all mortgage lenders offer Help to Buy loans
Help to Buy equity loans were not offered by every lender, so you had to do your research to find the right person.
4. Difficulty remortgaging
Help to Buy could make it complicated to remortgage since there were not a lot of Help to Buy remortgage deals around. If you were still repaying your equity loan, your remortgage rates would have been much higher. There was also a fee of £115 from the Help to Buy scheme to remortgage.
5. Only new-build homes
The scheme didn’t apply to older homes, and lots of buyers preferred the affordability and character of older buildings.
6. Permissions required
If you bought a property using the scheme, you may have had to request permission to make any alterations to the structure of the building. Oftentimes, major works wouldn’t get approved if there was still an outstanding loan, as it may have increased the home’s value, which would increase the repayment amount as discussed above.
7. Negative equity
The value of new builds drops as soon as they’re occupied. This means that the homeowners who used the scheme may have fallen into negative equity (when the market value of the home is less than what is left to repay on the mortgage). In the case of the Help to Buy equity loan, you would have loan repayments on top of the mortgage).
8. Regional price caps
To be eligible for the Help To Buy equity loan scheme you had to purchase a house with a purchase price below the regional price cap. This limited the number of houses available for purchase.
Help To Buy In Wales, Scotland and Northern Ireland
The Help To Buy equity loan scheme is available in Wales to help homeowners climb the property ladder. However, the Welsh scheme differs slightly and is running until March 2025.
As in England, buyers in Wales can also put down a 5% deposit and get a Help To Buy equity loan of 20% of the value of a new-build home. There is also a five-year interest-free period.
The biggest difference is that there is no regional price cap – the cap is £25300,000 across Wales. The scheme is also available to both first-time buyers and current homeowners.
Scotland also has several “help to buy your home” schemes available, which are offered by the government.
Northern Ireland differs the most. There is a not-for-profit organisation called Co/Ownership which helps people buy their homes.
Is Help To Buy Worth It?
The big question: Is the Help To Buy equity loan scheme worth it?
Currently, the scheme is no longer running in England; however, prior to March 2023, it was certainly worth it if you were able to repay the loan before interest rates increased.
The biggest benefit of the scheme was that first-time buyers could access lower mortgage rates with just a 5% deposit.
Of course, the downside was that the government owned 20% (or 40% in London) of your property, and if the market value increased, you would have had to pay more, benefiting the government.
If you were looking for a new-build home, your dream house was within the regional price cap, and you wanted to climb the first couple of rungs of the property ladder, then the Help to Buy equity loan scheme was worth it.
But, you need to keep in mind that remortgaging a house on this scheme could be difficult, as lenders consider the equity loan amount when estimating the property value.
FAQs
What is the Forces Help to Buy scheme?
The Forces Help to Buy equity loan scheme is to support those in the Armed Forces and help them purchase a home. Armed Forces personnel can borrow 50% of their salary (up to a maximum of £25,000) as an interest-free loan to purchase their homes.
Who is/was excluded from the Help to Buy equity loan scheme?
The scheme did not apply to existing homeowners or those looking to purchase buy-to-let houses. You had to sign documents which confirm that you meet all eligibility criteria to be approved for the loan.
Final Thoughts
The Help to Buy equity loan offer may have ended in March of 2023 in England, but it is still worth knowing whether it would be worth it for you should a similar scheme see the light of day. Variations of the scheme are available in Wales, Scotland and Northern Ireland, and it can be very helpful for those looking to get a foot into the real estate door with a low mortgage and a five-year interest-free period.
Additional Sources:
https://www.nerdwallet.com/uk/mortgages/pros-and-cons-of-help-to-buy-schemes/
https://www.money.co.uk/guides/what-are-the-pros-and-cons-of-the-help-to-buy-scheme
https://www.moneyhelper.org.uk/en/homes/buying-a-home/help-to-buy-scheme-everything-you-need-to-know
https://theweek.com/tags/help-buy