The pros and cons of the help-to-buy scheme

Plus: Who is eligible

The pros and cons of the help-to-buy scheme

The help-to-buy scheme was designed to help first-time homebuyers enter the housing market. While there are many benefits to this type of equity loan, there are just as many—or more—downsides. Here are all the ups and downs of the help-to-buy scheme. 

Is Help to Buy the same as equity loan?

Yes. The help-to-buy scheme is an equity loan. Essentially, Help to Buy is a government scheme for first-time homebuyers, wherein the government provides an equity loan that the buyer then uses to put toward the purchase of a new build. The aim of the help-to-buy scheme is to help first-time homebuyers get into the market. If eligible for an equity loan, homebuyers can borrow maximum 20% of the market value of the new build—that percentage rises to 40% if you live in London.

Throughout the equity loan’s term, homebuyers are only required to pay interest on the amount they borrowed, meaning they do not pay off any of the loan itself. Homebuyers do have the option, however, to pay all or a portion of it off at any point. If the home is sold, the owner does have to pay off all of the equity loan. A homebuyer is only eligible for an equity loan if they reserve a new build from a builder registered with the help-to-buy scheme.

What are the benefits?

Help-to-buy scheme equity loans help pay for a certain percentage of the property value instead of a set cash amount, meaning you might wind up paying back more money or less money than you borrowed, which depends on whether the value of your home increases or decreases.

There are many benefits of a help-to-buy scheme equity loan. Because the equity loan boosts your deposit, you could be able to get a loan easier than if you borrowed 95% from a mortgage lender. You will also be likelier to receive a better rate after taking out a mortgage on a small proportion of the property price. And if the property’s value falls, you will likely have to repay less, since the loan would be for a percentage of the property value instead of a set cash amount. Finally, a major benefit of a help-to-buy scheme equity loan is that the loan is interest-free for the first five years, which means if you are able to repay it before the interest starts, it is an inexpensive way to borrow.

What is the downside?

A help-to-buy scheme equity loan is not all roses, however. There are definite downsides. One is that the scheme has been accused of inflating the prices of new homes, meaning it could be more difficult to build up equity as your property might now grow in value. If the property does grow in value, you could end up paying back more since the loan is for a percentage of the property value instead of a set cash amount.

Finding a mortgage on a help-to-buy property can also be challenging, especially because not all lenders cater to the scheme, which can become a problem if you re-mortgage in a few years. If you want to purchase an older property, Help to Buy will not help you, since it is only useful to purchase new-build homes.

Finally, after interest starts it rises sharply—by 1% each year, according to the Retail Prices Index. And if home prices fall prior to your paying off your mortgage, you may be in negative equity. That means you would owe more on your mortgage, and equity loan, than the property is worth.

Who is eligible for the help-to-buy scheme?

To be eligible for the help-to-buy scheme, you must be purchasing a new-build property. You also must be a first-time homebuyer and have a deposit of at minimum 5%. Other conditions include that you are purchasing the property for less than the price cap in your region and you buy a property that you intend to live in the majority of the time. For Help to Buy, you cannot let out the property or use it as a second home, and you must take out a mortgage with a term of no more than 35 years.

How is the help-to-buy equity loan repaid?

You will not have to repay the help-to-buy equity loan until you sell your property or at the end of your main mortgage term, whichever comes first. But you do not have wait for either of these scenarios—you can repay the help-to-buy equity loan at any point as long as you follow the rules, such as repaying a minimum of 10% of your property’s value.

You can also repay the help-to-buy equity loan by re-mortgaging. But remember: whether or not this is the best option for you will hinge on whether the payments ware manageable and if you are currently within your mortgage term.

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