Since its introduction in 2013 the Help to Buy scheme has had a significant impact on the property market. Government figures show that between its inception in April 2013 and 31st March 2018, it was used in 169,102 property purchases and, whilst the scheme was due end in 2021, it has now been extended, for first time buyers, to 2023.
Not everybody is convinced that this is all good news. It is suggested that the scheme is increasingly helping higher earners (government figures show the average household salary for participants is about £50,000) and that it drives up property prices, particularly for new-build properties. The accusation is that the biggest beneficiaries are developers. The scheme will, however, be with us at least until 2023, so I set out below a few points you should be aware of if you are considering using it.
What can you buy?
The scheme is available for new-build properties, sold by registered builders, selling for up to £600,000 (different figures apply in Wales and Scotland). You cannot use the loan if you already own a property, anywhere in the world, or for a buy-to-let purchase.
How much can you borrow?
The maximum that can be funded by the scheme is 20% of the purchase price (40% in London) and you will need to provide at least 5% yourself. You will, therefore, need a mortgage of up to 75% of the value to fund the purchase.
When you apply for the loan, the Help to Buy Agency will carry out an assessment to ensure you can afford the mortgage payments and other outgoings for the property.
What do you pay back?
The funds are provided by an equity loan so, if you borrow 20%, you will pay back 20% of the value of the property at the time of repayment. For the first five years you are not required to make any interest payments but, from the start of year six, you have to pay 1.75% per year of the loan’s value. That sum will increase in each subsequent year by the rate of inflation plus 1%. The loan has to be repaid within 25 years, or on a sale of the house.
Anything else you should know?
Inevitably, the scheme has very detailed regulations, so this article cannot cover every nuance, but there are some points you will need to bear in mind:
- The intention is that borrowers will repay the loan when their personal finances permit, particularly after 5 years.
- The Help to Buy Agency must consent to any alteration of the property. You are expected to use any funds you have available to redeem, or reduce, the loan before making home improvements.
- If you want to reduce the equity loan by increasing your first mortgage, the Agency will make a further assessment to ensure you can afford the increased mortgage payments.
The pack of documentation provided to solicitors by the Agency on a Help to Buy purchase consists of some 100 pages so, if you have any questions about the scheme, you should seek advice from a solicitor or financial adviser.
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