Mortgage – Will the new help-to-buy scheme get first-timers on the property ladder? | Property
These are difficult times for anyone hoping to get on the housing ladder. The pandemic has made getting mortgages more onerous, while house prices have been climbing – the average cost of a property in the UK reached a record high last month.
But there may be some hope for first-time buyers in England with the latest version of the government’s help-to-buy scheme, which is aimed solely at them, offering a different level of help depending on where you want to buy.
How it works
The original help-to-buy equity loan scheme was launched in 2013 and runs until March. Almost 280,000 homes had been bought using it by last summer.
The new version offers similar terms – a loan of between 5% and 20% (40% in London) from the government to put towards a new-build house or flat – but, crucially, only first-time buyers can use it.
A buyer cannot have owned a home in the UK or abroad before. They must have a deposit of 5% and a mortgage of at least 25%. Homes could be reserved from last month and buyers can move in from 1 April.
Where you are buying dictates the maximum property price for which you can use the scheme. In London, it is £600,000, while in the north-east, it is £186,100. The figure is 1.5 times the average first-time buyer price in the area.
The loan is interest-free for the first five years and there is a £1 monthly management fee. In year six, buyers will be charged interest of 1.75%. This then rises every year by being multiplied by the consumer price index (CPI) plus 2%. The equity loan must be repaid when the mortgage is repaid, if the home is sold, or after 25 years.
If, for example, a home in the north-west was for sale at £200,000, the buyer would have to raise a £10,000 deposit. They could then take out a help-to-buy loan worth £40,000 and borrow the final £150,000 from a mortgage lender.
Homes England, the government housing body that administers the scheme, says builders have to adhere to more stringent conditions in this new phase. Previously, developers were accused of inflating the price of new-build homes.
Now, all those involved have to sign up with the New Homes Ombudsman, which is expected to launch this year, and follow a code of customer care, among other conditions. Homes England says there were 313 reservations under the new scheme last month, and that it expects there will be £25bn loaned by 2023.
Is it right for you?
The last year has been hard for anyone with a limited deposit. In January 2020, there were 140 mortgages available with a two-year fixed term for buyers with a 5% deposit. This was down to one last month, according to financial information firm Moneyfacts, showing how very limited the options are.
But that trend is changing, albeit slowly and at a price. “In recent weeks lenders have been dipping back into this arena, which is a positive sign for borrowers looking to secure a deal,” says Rachel Springall of Moneyfacts.
“However, the cost of these mortgages is higher, on average, than it was a year ago, so borrowers would be wise to seek advice to compare deals carefully to ensure it is the most appropriate choice.”
Barratt Developments, the UK’s biggest housebuilder, says that it is seeing strong interest from first-time buyers for the new deal and expects that to continue until the mortgage market opens up again.
But it adds: “It’s important we see lenders come back to the market with mortgages above 90% LTV for first-time buyers, so they aren’t over-reliant on help to buy.”
Those with a large deposit should seek financial advice to see whether the scheme is right for them, says Homes England. Those who benefit the most are buyers who will be able to pay off the government loan within five years and not have to pay any interest.
How much is paid back on the loan depends on the value of the home when the buyer chooses to repay. If it has risen, so will the amount paid back: if it has dropped they will pay less.
But the repayment will be the same percentage of the value that was originally borrowed.
To show the market value of the home when making a repayment, a valuation report from a qualified surveyor will be needed.
Buying a new build
The HomeOwners Alliance has raised concern about the threat of negative equity on new builds, as well as the hidden costs that could come with the purchase. “New-build properties depreciate, in the same way that a new car does,” says chief executive, Paula Higgins.
One of the criticisms of the help-to-buy scheme has been the claim that it subsidises a housing bubble and inflates prices. One in seven homes bought under the scheme lost value, despite booming local property markets, an investigation by consumer organisation Which? found last year.
“There have been cases of cheeky developers wanting to keep the purchase price high by rejecting their lenders’ valuation, and asking the buyer to shop around [for another lender],” says Higgins.
“If your lender returns the ‘wrong answer’ don’t feel pressurised into shopping around, or, as a minimum, ask for your out-of-pocket costs to be reimbursed.
“Other costs need to be factored in, such as legal fees, as well as more hidden costs you may not have thought of. If you are buying a leasehold, for example, you will have service fees; and if you are buying on a new-build estate you may be faced with estate management fees.”