Since beginning in 2013, the government led help to buy equity loan scheme has helped thousands of home buyers purchase properties in the UK. The scheme was introduced to help people who otherwise might have struggled to purchase a property, buy a house or an apartment essentially at a reduced price. However, after almost 10 years, the scheme is coming to an end…..and this time it’s for good.
How Does The Help To Buy Scheme Work?
The scheme is first and foremost only available on new build properties. That means that you can only use help to buy on brand new built properties that no one has ever lived in. This does however include buildings that have been renovated in to residential properties i.e. old factories. The scheme allows people to purchase residential properties using a 20% (or 40% in London) loan from the government alongside a mortgage. So for example, you might buy a £250,000 property from a builder. Outside of London you would secure a 20% help to buy loan which would be £50,000 and use this loan towards buying the property. The rest of the value of the property (75% = £187,500) would then be made up of 1) your own deposit and 2) a mortgage.
To use help to buy, currently you need three things:
1) You must be a first time buyer. You can’t have ever owned a property in the past. No exceptions.
2) A minimum of 5% of the full property price as a deposit (£12,500).
3) Be able to get a mortgage for the remaining value of the property.
What Happens To The Equity Loan?
The equity loan is exactly what it says on the tin. It is a loan so….you will need to pay it back at some point. For the first 5-years that you have the loan, it is completely interest free. If you have the loan 5 years or more, you will pay interest on the loan every year that you have it. You can have the help to buy loan for a maximum of 25 years. The longer you have the help to buy loan for, the more interest you will incur. The loan must be paid back by the end of the the 25 years.
Most people who use the loan to get on to the property ladder either pay off the loan when they eventually sell the house and upsize or they remortgage the property further down the loan and borrow a larger mortgage to pay off the loan. Either option has proved to be beneficial for most people who have made use of the scheme.
Help To Buy Coming To An End
The original scheme was due to only run from 2013 until 2016 to give a little boost to the housing market however it proved to be so popular and successful that the government extended it twice from 2016 to 2021 and then from 2021 until 2023 with no further extensions announced. The scheme will officially cease operation in March 2023 however the deadline for new applications has been set for the 31st of October 2022. Meaning that anyone who is still hoping to purchase a new build property using the scheme has until the end of October to get a property reserved, a mortgage arranged, a deposit sorted and a help to buy application submitted.
Once the application window closes in October, the following 5 months will be used to assess the last applications and allow property purchase completions to happen before coming to a complete end in March. The end of the scheme will certainly be the end of an era for lots of builders, solicitors, and mortgage advisors who have been helping clients with HTB new build purchases almost on a daily basis for the last 10 years. But, don’t fear, there are still schemes available to help cash strapped buyers and there will no doubt be new schemes introduced by the government in the coming years to replace help to buy.
Other Schemes Available
One of these scheme still available and proving very popular is the shared ownership scheme. The shared ownership scheme is fairly similar to HTB but in many ways is a much more beneficial alternative. Especially in places like London where property prices are disproportionately high compared to the majority of the country.
With shared ownership, you initially only purchase a share of a property with the option of purchasing more of the property further down the line. So for example, a 1 bedroom flat in North-West London might cost £400,000. Under the shared ownership scheme you could potentially purchase as little as 25% or the property (£100,000) essentially buying the property for £100,000. You would need to put down a minimum of 5% deposit (5% of £100,000 = £5,000) and then you would get a mortgage of £95,000).
But what about the other £300,000? And will I only be able to live in 25% of the property if that’s all I own?!
With shared ownership, the other 75% of the property that you don’t currently own is owned by a local authority or housing association. This organisation will charge rent on the 75% that they own so basically, every month you will pay your mortgage (which with the example used above could be as little as £350 a month.) and rent which could be around £600 a month. So your total monthly outgoings for a £400,000 apartment would be just under £1,000 a month.
You would be able to live in the entire property and over time you will be able to purchase more shares in the property off the local authority or housing association. This is called staircasing. Most people who purchase a shared ownership property initially purchase a low share, then a few years down the line when they have had salary increases or got new higher paying jobs, they will look at remortgaging the property and borrowing a larger mortgage to purchase a higher share. Reducing the monthly rent and increasing the monthly mortgage until eventually you have 100% ownership of the property.
If you or anyone else you know is a first time buyer and want to discuss your purchasing options post-help to buy, please feel free to give our helpful and knowledgeable advisors a call today to see how we can help.