Help to Buy chickens come home to roost
A home-owning dream realised could become a nightmare now that payback time has arrived
It was March 2013, when then-chancellor George Osborne declared: “We’re going to help families who want a mortgage for any home they’re buying, old or new, but who cannot begin to afford the kind of deposits being demanded today” – an offer, he said, which would help people achieve the aspiration of becoming a homeowner.
He was announcing the launch of Help to Buy, a twopronged scheme designed to make it far easier for people with small savings to get on to the property ladder. The first was a loan, worth up to 20 per cent of a property’s value and interest-free for five years, to be added to a minimum 5 per cent deposit and used to buy a new-build property.
The second was a unique mortgage “guarantee”, available to lenders to incentivise them to offer more mortgage deals to small deposit savers.
The Help to Buy brand got a new addition to its family two years later in the form of the Help to Buy Isa. For every £200 you save each month, the Government will add a £50 bonus, so that you can build a deposit as fast as possible.
To date, the Help to Buy equity loan scheme has helped 136,000 first-time buyers get on to the property ladder, and the government has lent out almost £9 billion.
It’s a similar story with the Help to Buy Isa – the most recent stats show that £157 million in bonuses has been paid to just shy of 200,000 people who have bought their first home.
But now, Mr Osborne’s policy of providing loans to first-time buyers is being put to the test. The first borrowers of an equity loan are seeing their interest-free period come to an end this year, and now trying to figure out what happens to their loan and mortgage.
The loan is a percentage of the value of your property, not a fixed amount. You could end up paying back more or less than you borrowed, depending on whether your home rises or falls in value.
For example, if you take out a 20 per cent equity loan to buy a property worth £200,000 – a loan of £40,000 – and when you come to sell, the property is worth £250,000, you’ll have to repay £50,000 – 20 per cent of the new value of your home.
And after five years, you will have to pay a monthly admin fee, which starts at 1.75 per cent of the loan. It will then rise every year by any increase in the Retail Prices Index plus 1 per cent. Many borrowers have taken out a mortgage for 75 per cent of the property for five years, along with the 20 per cent loan, meaning it’s time to switch to a new deal.
The trouble is, there isn’t a huge pool of lenders out there that are willing to take on homeowners with Help to Buy equity loans, and of those that do, many have strict conditions about how much they’ll lend. Some will only lend to people who have paid off the equity loan in full – a herculean task for many to have achieved in five years.
If you’re in this situation, you have one of three options.
The first is to remortgage to buy out part oral loft he government’ s loan. If your propertyhas increased in value, you could consider releasing some cash to pay off some or all of your equity loan by re mortgaging. You’ll also need to factor in legal and valuation costs, and will have to notify the Homes and Communities Agency. Of course, if your property’s value hasn’t increased enough, this won’t be an option.
You could keep the loan in place and start paying interest on it. That means, however, you’ll be making loan interest payments, mortgage interest payments and capital repayments – so that could put some pressure on your finances.
The final option is to sell your home and pay off the loan. If you’ve enjoyed significant price growth or your circumstances have changed, you might be ready to make the move elsewhere, perhaps into a larger property that’s not a new-build. In this scenario, you could sell your home and pay off the equity loan in full.
Fortunately, some of the bigger lenders are coming around. This week, Natwest has launched a range of Help to Buy remortgage products, which allow homeowners with other lenders to remortgage on a like-for-like basis, keeping the same balance and term but getting them out of the formal equity loan scheme.
Natwest joins the likes of Tesco Bank and HSBC in offering flexible solutions for homeowners who reach this head-scratching part of the Help to Buy journey.
If you’ve bought a new-build property with a Help to Buy equity loan, it’s worth getting prepared for your fiveyear anniversary as soon as possible. The scheme may have brought you the dream of ownership, but if you don’t take the right actions, the realities of the deal could end up giving you nightmares.