Started in April 2013, the Help To Buy’s (HTB) first successful applicants reached or will reach the end of their no-interest five year period this year (2018). The scheme’s objective was to help first-time homeowners who can afford mortgage repayments but unable to raise a deposit purchase homes.
The Help to Buy Scheme
The scheme started out with a budget of £3.7 billion, which later increased to £10 billion in October of 2017. This should run till the end of the scheme, planned to run till 2021.
By late September 2017, 145,000 homes had been bought under the Help To Buy system. According to data on the scheme, 38% of Help To Buy borrowers are in an income below £40,000 and average 32 years of age.
Under the scheme, the government provides 20% (40% for London) interest-free loan on the total value of a newly built home. The amount is interest-free for the first five years of the repayment duration, after which it starts accruing interest. With the scheme’s initiation in 2013 and the five-year grace period, 2018 has been the year of reckoning in terms of repayment.
The scheme’s benefits only applies to newly build properties and aimed at increasing housing supply to meet buyer demand. The five year buffer period is an added advantage in that house owners get a chance to own homes without the immediate worry of repaying the 20%/ 40% on their loans.
How the Figures Work Out
- The equity loan provides a loan of 20% (40% for London), with a maximum price tag of £600,000 on each house.
- Borrowers are not allowed to sublet this home, nor own another by the time they are purchasing a home under the Help To Buy scheme.
- The buyer fronts a 5% down payment, and a lender finances the rest (55% – 75%).
- On the mortgage end, an applicant has to meet a 4.5 x income stipulation.
- When the interest on the government loan kicks in after five years, the borrower is charged 1.75% interest on the outstanding amount. This amount will go up 1% each year, on the previous year’s rate in line with the Retail Price Index (RPI).
Pros Of The Scheme
- You are able to own a home with a 5% deposit, which is considerably lower than other mortgage plans.
- Your loan is interest-free for five years, where you are only paying mortgage fees.
- You can access cheaper mortgage rates. Borrowing less than the standard 95% mortgage gets applicants more competitive interest rates, and increases your chances of qualifying.
- You can own a house sooner, as long as you have 5% of the total coat saved up (as opposed to waiting till you accumulate the higher down payment amount required in standard mortgage plans).
Cons Of The Scheme
- The HTB Loan is increasingly expensive when you factor in the 1% yearly increase in interest plus RPI of the preceding year’s rate.
- Your loan amount is not fixed, which is harder to plan for. For one, should RPI shoot up radically, the interest applied to your loan could go up as well. Further, the amount you will pay on your loan fluctuates with the market value of your property. Therefore, if your house rises in value, you will pay a higher amount than what you had borrowed.
- You are restricted to newly build homes and limited developers, which means you have to contend with what’s on offer and not necessarily what you want.
- You are restricted to certain lenders on this plan.
- You could suffer negative equity. With rising claims that Help To Buy is inflating property prices, there is a concern that the property market bubble will burst after the conclusion of the scheme, leaving a considerable number of property owners in negative equity. These plans are best suited for homeowners who plan to live in the house for many years.
- When the interest kicks in after five years, it can grow into an overwhelming amount over time. Considering that this interest is paid simultaneously with the mortgage you took out, the amounts can really stack up.
Options for HTB Recipients At The 5-year Tail End
For homeowners reaching the end of the five years interest-free period, here are your options:
You could remortgage to fully finance the house purchase in two ways:
- Remortgage your mortgage and retain the equity loan.
- Remortgage to clear part of or all of the equity loan, resulting in a bigger standard mortgage.
If you opt to remortgage, you will pay a £115 fee to the Help To Buy administrators. This is exclusive of other mortgage fees you may have to pay.
Figure out if this will work in your favour by compiling a complete list of expenses to gauge how much this option will cost or save you in the long run.
Keep the House and Clear the Interest
The HTB scheme allows you to pay early. This gives you two options; pay off the loan in a lump sum or keep to your repayment schedule. Paying off the loan is the best option as you avoid interest loans and fully own your home quicker. This gives you more options if you would like to sublet or sell the property.
You will also pay £200 as an administration fee to pay off the loan. This is again on top of other charges you might have to pay, and it’s advisable to come up with a comprehensive list of fees and a total amount.
Sell the House and Relocate
Your third option is to sell, (especially if the price has gone up) and keep the amount that’s in excess after repayment of your loan. Again, this allows you to save on interest. Upon selling your property, you have to pay the government loan in full. This is 20% of the sale price, regardless of whether or not its value fell or went up.
Regardless of when your 5-year no interest period ends, it will be great to start exploring your options with your financial position in mind and work towards the next step in your ownership journey.