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Help To Buy

12/12/2014

Whether you are putting your first step on the property ladder or moving up it, Help To Buy is a government scheme providing the opportunity for people to buy a home with a deposit as low as 5%. In its first year Help To Buy has assisted around 20,000 buyers. The scheme has hit the headlines recently with market commentators, the Prime Minister and Governor of the Bank of England all reflecting on the impact the scheme has had after its first year.

 

By way of background, there are two options under the Help To Buy (“HTB”) umbrella. Under both schemes, first time buyers as well as existing homeowners wanting to move are eligible, where a property is being purchased for up to £600,000. The new property must then be the buyer’s only property and they must occupy it themselves.

 

The first option is the Mortgage Guarantee. Buyers will need a deposit of at least 5% and a mortgage for the remaining amount of up to 95%. The guarantee itself will be between the lender and the government.

 

Mortgage Guarantee is available across the UK from participating mortgage lenders, although it will only apply to repayment mortgages not interest-only or self-certified mortgages.

 

The second option is the Equity Loan. Buyers will again need a deposit of at least 5% but will then take a 20% equity loan from the government to top it up. They will then only require a 75% mortgage. The Equity Loan is separate to the mortgage and exists between the buyer and the government.

 

There is no interest payable on the loan during the first five years, but then from year six interest will be charged at 1.75% of the loan’s value, increasing each year by the retail price index plus 1%. It is therefore important for buyers to consider this when thinking about affordability.

 

Buyers may pay back the Equity Loan at any time, although the key times are likely to be when they sell or at the end of the mortgage. There is a catch however as whenever the property is sold, 20% of the sale price will be payable to discharge the loan. This may therefore be more than the amount originally borrowed if the property has increased in value.

 

Equity Loan is available in relation to new build homes only, and not all will be eligible as the developer themselves must take part in the scheme.

 

The principal benefit of HTB is that it aims to help more people to buy a home. It will be the case that those using the scheme can afford the mortgage payments, as their lender’s usual eligibility criteria will still apply, but they would otherwise have struggled to have a sufficient lump sum to put down as the deposit.

 

But what is the true cost of HTB? Buyers must take into account the medium to long term position when looking at affordability. For example, Mortgage Guarantees may mean that 95% mortgages are more readily available, but the interest rate charged by lenders may be high (many are around 5%). Whilst with an Equity Loan, Buyers are only buying 80% of the property and will have to pay interest in due course raising concerns about longer term affordability.

 

The National Audit Office has in fact reported that those with Equity Loans may owe more than five times their income, which could cause problems if interest rates rise. The repayment of the loan itself could also be problematic if there is insufficient equity in the property when it is sold.

 

Buyers must therefore be careful not to over stretch to buy a property, as they could be at risk in the future if the market and interest rates change.

 

However, in its first year HTB has been popular and many people have taken advantage of the scheme.

 

The statistics seem to indicate that, whilst HTB still accounts for only a small proportion of the total number of residential purchases, it is having a positive impact on the new build market. A growing number of new build purchases involve HTB, and there have been reports of increases in the number of planning applications and orders for new residential construction. What is difficult to decipher however is how many of the new homes perhaps would have been built regardless of HTB.

 

At present, HTB is due to end in 2017. It will be interesting to see what happens in the meantime and what exit strategy there will be for when it ends.

 

For more information please contact Rebecca Freeman on 01789 206924 or by email.

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