12 May The pros and cons of the ‘Help to Buy’ equity loan scheme for new builds
As news comes in that almost 50,000 new build home buyers have taken advantage of the Government’s brainchild – the ‘Help to Buy’ equity loan scheme, we look at the pros and cons in the context of the shaky new shoots of the recovering property market.
What is the Help to Buy Scheme?
In recognition of the difficulties that first time buyers have in getting onto the first rung of the ladder, successive governments (and shadow governments), have mulled over the different creative ways they can help FTBs, whilst at the same time boosting the economy, the housing market and the profits of the major house builders.
And so was born the Help to Buy equity loan scheme (different from the Help to Buy Mortgage guarantee scheme), whereby those who couldn’t get together enough deposit to buy a new build house could borrow it from the government. The government loan up to 20% of the purchase price of a new build home, with the other mandatory 5% having to come from savings (or other independent sources). And it isn’t just open to first time buyers either, but the home must still be a new build and it must cost under £600,000. A recent report by property site Zoopla revealed that 82% of those using the scheme were first time buyers.
There are now almost 50,000 people living in beautiful new homes that otherwise could not afford them. And because the terms of loan are relatively mild, (no fee for the first five years, 1.75% in year 6 and an increase of RPI + 1% each year), it works out quite affordable for those who will go on to increase their earnings over the same period.
The scheme works out better for buyers in a falling market too, as the property is shared equity, so too are the losses. Past schemes saw home owners liable for repaying an equity loan that stayed the same, regardless of property value – a major headache in a falling market when most were sold on the back of rising prices. This scheme protects buyers from that in that when the house is sold. The Government receives 20% of the sale price, whatever that may be.
Help to buy equity mortgage rates are also competitive and in line with other 75% LTV rates, with no apparent penalty for using the scheme.
House builders stay in business and the UK gets more new homes because more people can afford to buy them. This has secondary effects for the economy as a whole, with the construction industry being a major employer and revenue generator.
You can buy the 20% back later, when you have better access to finance and have increased your earnings, or if you come into some unexpected money.
If you sell in a falling market, you have to give the government 20% of the value of the house, not the equity. You still have to repay the full amount outstanding on your mortgage, which could be less than you have left after repaying your equity loan.
There could be increased stagnation in the middle of the market as first time buyers ignore existing starter homes, the owners of which may be unable to sell and move upwards.
Earlier equity loan schemes, from house builders and the previous government, got a bad press because they put the buyer at a major disadvantage from the start. This new Help to Buy equity loan scheme actually has many positive aspects all round. For those with a long-term view, this is a very cheap way to buy a nice property in a nice area. Not only does it keep the monthly costs down, it gives buyers a chance to accrue the 20% extra through house price rises or saving, whilst not suffering any major penalties other than an increased monthly cost if plans don’t come to fruition.