What are the pros and cons of the Help to Buy scheme?
The Help to Buy scheme has been under the spotlight in recent months, can it help you buy?
Pros to the Help to Buy scheme
You may be able to buy a home sooner
You could buy with a smaller deposit
You can borrow interest free for five years
You get a competitive loan rate after that
You get access to cheaper mortgage rates
Cons of to the Help to Buy scheme
Your loan will be increasingly expensive
Your loan amount is not fixed
You are limited to selected new build homes
You can only use certain lenders
Negative equity is a danger
Fees and other terms could change
What are the advantages of the Help to Buy scheme?
If you want to move house but cannot quite afford the deposit, the government's Help to Buy scheme could make a big difference.
You get help buying a home
Giving thousands of people a foot onto or up the property ladder, boosting the housing market, shifting new build homes and helping the wider economy are some of the reasons the scheme was introduced.
You need a smaller deposit
You still need to save for a deposit to buy a home through Help to Buy but it is set at a more manageable level of 5%. This is much lower than many other mortgage options meaning you could buy more quickly.
You get to borrow interest free
Although there are no loan fees due in the first five years, the amount you owe can still increase during that time. Your equity loan will rise and fall with the housing market, so if your house increases in value, so will the amount you owe.
One of the main selling points of the Help to Buy scheme is that you do not pay any interest on your loan during the first five years.
For first time buyers in particular, these first five years can be some of the most financially strenuous, so the fact you get a few years of breathing space can certainly be viewed as an advantage.
You will still need to make mortgage payments during this time (which will include interest), but no interest will be added to your Help to Buy loan.
You get access to cheaper mortgage rates
As you need to borrow a lesser Loan to Value, you are likely to get a more competitive rate of interest than if you simply went for a standard 95% mortgage.
You get a competitive loan rate (after five years)
If inflation soars during any 12 month period, you could see a sizeable jump in the rate of interest applied.
After not paying interest on the equity loan for five years, the initial rate of interest - 1.75% in the sixth year - is quite generous in the current market.
After the sixth year, the rate of interest will increase by 1% plus any increase in the retail price index (RPI) which is a measure of inflation.
If the RPI falls at any time your charges will still increase by at least 1%.
What are the drawbacks for Help to Buy?
Although Help to Buy may give you the opportunity to purchase a new build home that you may not otherwise be able to afford, there are some limitations to carefully consider.
Your loan will become more and more expensive
Although you will benefit from five years without interest, after this time the rate of interest applied to your loan will increase each year.
While you will only pay 1.75% in your sixth year, each year your loan fee will increase by 1% plus any RPI increase.
The creeping cost of fees could be storing up a problem you will be forced to deal with further down the line. Should RPI increase dramatically, so could the rate of interest applied to your loan.
Your loan is not fixed
The amount you will ultimately need to repay on your Help to Buy equity loan is not fixed. Instead it will fluctuate with the market value of your property because it is percentage-based.
This means that if your house has risen in value you may be eligible to pay significantly more than you originally borrowed.
You can only buy new build properties
Currently the Help to Buy scheme is only available on new properties which will limit your choice of home. It is also only offered by some developers so your choice of property will be limited too.
You may feel that you are paying a premium for buying new, so unless you really want a new property you should consider other options, your broker can support you with this, considering the whole of the market in their advice.
You can only borrow from certain lenders
Not all providers offer Help to Buy mortgages, and those that do often make them different from their standard mortgage packages. This is because a third party is involved with the purchase of your property, and they also have a claim to part of the sale value.
While mortgage rates available through Help to Buy are better than their 90%-95% mortgage equivalents, you need to compare your options and hunt around for the most competitive mortgage deal you can.
You could face the danger of negative equity
Some property experts claim that the Help to Buy scheme has started to inflate house prices.
They are concerned that it is causing a housing bubble that will burst when the scheme ends, trapping a vast number of buyers in negative equity.
If you are buying a new home as an investment in the hope you will be able to move in the short to mid-term this could be an issue - if you are planning on living in the property for many years this will be less of a problem.
You do not know if the terms might change
While you can only plan your finances based on information you currently have available, a future government could review and change the terms of the scheme. Again, a broker can help guide you through your options.
What are the alternatives to Help to Buy?
Before you make a final decision on the Help to Buy scheme, you should compare it with your other options.
These include other ways to get on the ladder with a small deposit or considering renting while you continue to save up.
Talk to a Create broker for expert advice on Help to Buy and beyond.