The Help to Buy Scheme
The UK Government Help to Buy scheme was probably created with good intentions. The scheme was meant to deliver millions of new AFFORDABLE homes and help hard working people to purchase their first home.
Who are the winners and the losers?
According to www.helptobuy.gov.uk , Help to Buy: Shared Ownership and Help to Buy: Equity Loan were introduced to help hard-working people like you take steps to buy your own home.
With the government's Help to Buy: Shared Ownership scheme you can buy as little as 25% or as much as 75% of a home and pay rent on the rest.
Help to Buy: Equity Loan makes it possible to buy a home with just a 5% deposit and up to 20% loan (40% if buying in London) from the government subject to eligibility.
Our focus will be on Help to Buy: Equity Loan. For more information on the Shared Ownership, visit the help to buy website in the links provided at the end of this article.
Help to Buy Equity Loan: Fantasy
At first glance, it seems really good that instead of getting a typical mortgage of 90% LTV meaning you provide 10% and the bank will lend you 90% of the property value, you can now provide a deposit of 5%. Thanks to your knight in shining Armour, the Help to Buy: Equity Loan Scheme.
In some sort of twisted dark fantasy, developers welcomed this idea with open arms and started overpricing new build properties which are the only properties you can purchase with the Help to Buy Scheme.
If things were straight forward, for simple mathematics and illustration purpose only:
You want to buy a property worth £200,000.
Instead of looking for a £20,000 deposit to combine with £180,000 loan from the bank, you can now buy with a £10,000 deposit with the option of getting up to £40,000 equity loan from the government (interest free for 5 years) reducing your borrowing from a mortgage provider to £150,000 and boosting your chances of getting an approved mortgage based on your earnings and credit history.
If you are keen on using the Help to Buy scheme and earn a decent salary accompanied by good credit history, you can put down £10,000 and get a loan of only £10,000 from the government and still get approved for a 90% loan from a mortgage provider. This limits how much you will have to pay back the government assuming the value of your property goes up (with equity loan you pay back same percentage of the property value you borrowed from the government plus interest after 5yrs of no interest, not the exact amount you borrowed).
The developers get to build and sell their new built homes,
construction workers get jobs,
Everybody wins including the government.
The above ideal case would have been lovely but it’s very far from reality.
Help to Buy Equity Loan: Reality
Scenario below is closer to reality.
Thanks to lack of regulation by the government, property developers knowing that the government can provide a 20% equity loan started hiking prices of new buildings.
Developers can now put a price tag of 240,000 on the same building and the only help you now get is help into more debt because the developers will reap most of the benefits as they’ve played you to have no choice but to get the 20% equity loan from the government and stretch your initial deposit to £12,000 (mandatory 5% of the property value) in order to be able to afford the purchase of your new home.
Although you only have to find just £2,000 more to add to your initial deposit to be able to afford the new home which might not seem so bad, you will be paying £40,000 more and owe the government and the mortgage provider more money. All the help to buy is doing in this case is helping you to get into more debt and you can guess it, in this game, you are the loser and this is a choice that most first time buyers have gone with.
The first batch that took this route when the scheme launched in April 2013 are due to start paying back the interest on their equity loan. To read more about this, see useful links section of this article.
How to Play Safe
It’s not all doom and gloom. To make the most of the help to buy scheme you have to make sure you are not overpaying for the property. Check price of properties in the area especially what people are paying for similar size (area, not room numbers) properties. Get developers to give up as much as possible. Some developers will offer to decorate the new home (worth thousands of pounds) and even pay stamp duty (no stamp duty for first homes less than £300,000) if you push them hard enough. That way you are getting a total package that’s more in line with the property value.
What's the Way Forward?
In order for Help to Buy to achieve what it was set out to achieve, the government will have to regulate the pricing of these new builds with help to buy eligibility. New homes should be affordable before they qualify for the Help to Buy scheme.
That way, innocent people trying to get on the property ladder will be protected from the claws of greedy property developers.
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Definitions and Useful Links
Help to Buy Scheme: Government scheme to assist those interested in buying new build to step on to the property ladder and in turn provide more homes in the UK.
LTV (Loan to Value): If your deposit on a £100,000 property is £10,000, since your deposit is 10% of the property value, LTV is the remaining 90%
You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland.
For first time buyers, you can claim a discount (relief) so you don’t pay any tax up to £300,000 and 5% on the portion from £300,001 to £500,000.
Help to Buy Equity Loans
What they are & how to pay them off:
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