What is Help to Buy and will it help me...?
The Government has created the Help to Buy scheme to help hard-working people like you take steps to buy your own home. Whether you want to get onto the housing ladder or move up it, Help to Buy makes it possible to buy a new-build or existing home priced up to £600,000 with as little as a 5% deposit.
What scheme is best for you and how do they work?
Option 1 - Equity Loan...
With a Help to Buy equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest.
You won’t be charged loan fees on the 20% loan for the first five years of owning your home.
At a glance - buying a 200k home
If the home in the example above sold for £210,000, you’d get £168,000 (80%, from your mortgage and the cash deposit) and you’d pay back £42,000 on the loan (20%). You’d need to pay off your mortgage with the share of the mortgage.
Option 2 - Mortgage Guarantee...
A mortgage supported by the Help to Buy mortgage guarantee scheme works in exactly the same way as any other mortgage except that under the scheme the Government offers lenders the option to purchase a guarantee on mortgage loans.
Because of this support, lenders taking part are able to offer home buyers more high-loan-to-value mortgages (80-95%).
At a glance - buying a 200k home
You will still be fully responsible for your mortgage repayments. So if you have a 5% deposit, you will need to take out and pay back a 95% mortgage.
What are the drawbacks for Help to Buy?
Despite Help to Buy giving you the opportunity to purchase a new build home that you may potentially not otherwise be in a position to afford, there are a number of limitations that we will carefully and thoughtfully consider before helping you reach your final decision.
Your loan is not Interest free indefinitely and will become more and more expensive. Although you will benefit from Five years interest free on the loan this will change after the five year period and you will then pay interest on the loan amount outstanding to which the interest rate will increase each year.
While you only pay 1.75% in your sixth year, each year your loan remains outstanding the loan cost will increase by 1% + any RPI increase and therefore longer term planning is essential as creeping cost of fees could be potentially be an issued you will be forced to deal with in the future.
We must anticipate that should RPI increase dramatically, so potentially could the rate of interest applied to your outstanding loan.
You can only borrow from certain lenders
With Help to Buy you can't simply apply for any mortgage on the market.
Not all mortgage providers offer mortgages to Help to Buy clients, and when they do they can be treated different from their standard mortgage products. This is because there is an approved third party involved with the purchase of your proposed new home who also have a right to claim to part of the potential sale value.
Help to Buy Equity Loan only available to new build properties
The Help to Buy equity loan scheme is only available on new properties which will seriously limit your choice of home although you can look at the alternative Help to buy mortgage guarantee scheme should your preference be that of second hand property.
Dangers of negative equity
Some property experts are claiming that the Help to Buy scheme has started to inflate house prices.
There are concerns from experts that the Help to Buy scheme is starting to inflate prices and causing a housing bubble which will burst when the scheme ends and potentially trapping a vast number of buyers in negative equity. If you are planning on living in the property long term this will be less of a problem although shorter term property investment may need further additional consideration.
Fees and Charges could change.
While there are no plans to amend the Help to Buy fees or charges applicable in theory there will always be a potential for changes to be implemented.
For example a future government could change the terms of the scheme meaning that you will have to adapt and reassess your finances. While less likely these is always an element of additional risk.
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