The pros and cons of the ‘Help to Buy’ equity loan scheme for new builds
WHAT IS A HELP TO BUY SCHEME?
Help to Buy schemes come in many guises, and with new rules being brought into place, with the Equity Loan Scheme, in March 2021, it seems a good time to have a closer look and weigh up the pros and cons of the help to buy scheme:-
Shared Ownership scheme – This scheme offers the opportunity to buy, between 25% and 75% of the property value and pay rent on the remaining share, then later, buy a bigger share as and when you can afford it.
Equity Loan Scheme – In this scheme the Government lends you up to 20% of the cost of a newly built home. This allows those with only a 5% deposit, to put down a larger 25% deposit and only have to take out a mortgage for the remaining 75%. There are no fees on the equity loan for the first five (5) years. This also gives the buyer access to better mortgage deals which tend to be offered when a 25% or more deposit is available.
A final scheme was the Help to Buy ISA – although the scheme itself closed to new registration in November 2019 those who took out the ISA can continue with the scheme until November 2029. The benefit of this scheme was that the Government will boost your savings by 25%. So, for every £100 you save you receive a a government bonus of £25.00 this is up to a maximum of £3,000 in bonus payments.
WHAT ARE THE ADVANTAGES OF THE AVAILABLE SCHEMES?
There are a number of pros to these schemes such as:-
- For those who would find it difficult to raise the needed funds to buy, the schemes bring the reality of owning your own home forward. Therefore, buyers are able to purchase their home sooner than they would other wise. This is good for the buyers and good for the housing market as a whole, as first time buyers are needed to kick start the housing market. The larger number of first time buyers in the market allows others already on the housing ladder to move more easily, helping to prevent a stagnant market place.
- Only having a small deposit, which is the position the majority of first time buyers find themselves, the schemes allow the benefits of better rates or future prospects of full ownership in the future. This is something that some students who have finished university confirm is the main advantage. After the high costs of attending university many students have never had the opportunity to save money for a house purchase deposit, these schemes allow the purchase to go ahead with a minimal deposit of 5% from their own funds.
- The Equity Loan Scheme is particularly helpful in the early years when it is more likely that cash flow is difficult, due to say lower wages or the repayment of student loans.The interest free element which lasts for five (5) years really assists the buyer in the early stages when the help is most needed.
- A lower rate mortgage would not be available for most first time buyers with only small deposit. The raising of the deposit to 25% unlocks the better rates and deals available. Most mortgage companies will only offer these more advantageous rates to holders of a 25% deposit or more. Also with that level of deposit the mortgages themselves contain better terms and are likely to be less expensive to take out, both initially and in the longer term.
The high numbers of first time buyers taking up these schemes assists the economy by moving new housing stock more swiftly, thus builders are able to continue on to new sites and build more new homes. This in tern assists with the national shortfall of housing which causes problems at all levels of the housing market.
WHAT ARE THE DISADVANTAGES OF THE SCHEMES?
For all schemes whilst there are undoubtedly great advantages there are always disadvantages which should be considered and taken into account. The decision to take out a mortgage with the assurance of one of the schemes should be weighed up and considered against your personal circumstances. Only then can a decision be made that it is right for you. In contrast to the advantages listed above here are some of the potential disadvantages to take note of:-
- When you take out the Equity Loan Scheme, after the first the first five years the loan becomes increasing more expensive. It is then that you need to be able to find funds to make the extra repayments required when interest is added to your repayments. It is anticipated, by the schemes authors, that you will be earning more than when you first purchased the house. However, in these increasingly uncertain times, this is no longer always the case. The extra repayments have to be made and for some it makes times difficult.
- Most loan repayments are for a fixed amount so that you can budget for them. In the case of the Equity Loan Scheme, the repayments vary after the first five years. This can cause budgeting difficulties especially if a family has arrived or has been made larger during that time and expenses have risen. Having certainty in repayments is always a great help and the scheme introduces an element of variability to costs.
- The schemes are only available on new build homes. Many consider that some builders have raised the prices on new builds to take advantage of the scheme so it may be that some scheme participants have paid over the market value. This in itself is not such an issue but if on re-sale, say five years later, the properties are only selling for a little over their initial purchase price then there can have been no advantage to the buyer. Most buyers anticipate, upon re-sale, a reasonable return on their purchase and it has been seen on occasions, due to the inflated prices, that these anticipated returns have not been made.
- Negative equity is also a danger with these schemes. If house prices generally go down, due to an economic downturn, a buyer can be left with negative equity.
- The scheme is only available through particular lenders. It has been found that these lenders make the loans for the schemes into a package. This is mainly because there can a third element to the ownership who has a call on the property, which can curtail some of the competitive elements of other mortgages. You do not have as much choice as you would otherwise.
A final element is the uncertainty of the Government schemes. No one can be sure that the Government will continue with these schemes without changing the terms, particularly in light of the present economic issues facing the country.
WHAT SHOULD YOU DO?
It is always best to look at all of the pros and cons of the help to buy scheme before committing to use it. Weight up what would work best for you. Consider which mortgage offer you could obtain with a smaller deposit or whether or not continuing to rent whilst saving up a larger deposit would be a better option.
Having dealt with a large number of transactions since the inception of the scheme, Express Conveyancing and our Panel of Conveyancers have a wealth of experience in dealing with it.
Please also read our article on which has been recently updated to cover more information on the Topic of Help to Buy Loans by clicking the link below –