What fifth anniversary of Help to Buy means for borrowers

It had become increasingly difficult – nigh on impossible – for many people to get onto the first rung of the property ladder largely as a consequence of soaring house prices, stagnant wages, and many people stuck in a cycle of renting, leaving them unable to save for a deposit.

The interest-free for five years equity loan was for up to 20 per cent of the value of a property outside London, or up to 40 per cent for those homes in London.

So far, the equity loan has done what it set out to do, according to the Ministry of Housing, Communities and Local Government, which reports that 2017 saw the highest number of first-time buyers in the UK since 2006.

According to the latest Help to Buy figures, published on 26 April 2018, since the launch of the scheme in April 2013 to the end of 2017, 158,883 properties were purchased with a Help to Buy equity loan.

In that period, the total value of the loans was £8.3bn, while the total value of properties bought under the scheme is £39.3bn.

First-time buyers continue to account for 81 per cent of purchases using the scheme.

How it works

When the government launched the Help to Buy loan it was only meant to be a three-year scheme.

But Craig Hall, new build manager at Legal & General Mortgage Club, forecasts the scheme will still be around "beyond 2021", although whether the Ministry of Housing makes any tweaks to it remains to be seen.

The government website helptobuy.gov.uk sets out exactly how the loan works: "With a Help to Buy: Equity Loan the government lends you up to 20 per cent of the cost of your newly built home, so you’ll only need a 5 per cent cash deposit and a 75 per cent mortgage to make up the rest.

"You won’t be charged loan fees on the 20 per cent loan for the first five years of owning your home."

Below is an example of how this would work for a house worth £200,000.

Source: helptobuy.gov.uk

The website confirms what would happen to that loan on sale of the house: "If the home in the example above sold for £210,000, you’d get £168,000 (80 per cent, from your mortgage and the cash deposit) and you’d pay back £42,000 on the loan (20 per cent). You’d need to pay off your mortgage with your share of the money."

So, why is the fifth anniversary of the equity loan scheme such a milestone?

As a spokesperson for the Ministry of Housing explains: "Under the Help to Buy equity scheme, buyers are required to make interest payments on the loan after five years and this will start from April 2018."

Those homebuyers who took out the Help to Buy loan back in April 2013 will have had to begin making repayments last month – the first under the scheme to do so.

As Rob McCoy, senior product and business manager at TMA, points out, the interest on the government loan is 1.75 per cent.

“This rate slowly increases year-on-year in line with the Retail Price Index plus 1 per cent,” he notes.

“The Help to Buy scheme was a mortgage plus an equity loan, as well as the borrower’s deposit. The mortgage was provided by one of many lenders, with the equity loan provided by the government. This loan helped borrowers make the first step onto the property ladder.”

He confirms those buyers who can repay the loan within the first five years will not have to pay interest.

Borrowers need to budget in advance of year six so they can afford the new monthly outgoing once interest becomes repayable on the equity loan.Michael Taylor

“However, for those that cannot repay in this time period, at the start of the sixth year for these borrowers, the loan is now a very real financial commitment in addition to their mortgage payments and other household costs and outgoings,” Mr McCoy suggests.

It is important to note that anyone who took out a Help to Buy equity loan, whenever that was, will have been told about the repayments and the interest should they only start repaying after five years had lapsed.

And those borrowers should also be getting a nudge to begin preparing for those repayments.

The Ministry of Housing confirms: “The Help to Buy equity loan post-sales loan mortgage administrator is currently contacting customers to ensure they are aware of the requirements and that arrangements are in place to enable them to make their payments.”

Keeping track

While the repayments are a key feature of the scheme, borrowers do need to make sure they understand exactly what this involves when they first take out the loan.

Michael Taylor, group marketing manager for proposition development at Santander, says: “It’s very important that anyone buying using the Help to Buy scheme understands how the equity loan arrangement works and is clear about the additional commitments that come with this type of loan arrangement. 

“Some of the key features of the scheme occur in the future, after the loan is taken out. Therefore, ongoing engagement between the equity loan provider and borrower is critical so that borrowers are prepared when the monthly repayments are due after year five, and remember that up to 20 per cent of the value of the property (up to 40 per cent in London) is repayable to the government.” 

He emphasises: “Borrowers need to budget in advance of year six so they can afford the new monthly outgoing once interest becomes repayable on the equity loan.”

For many, this period is something of a test for the equity loan scheme itself.

Lindsay Judge, housing expert at The Resolution Foundation, notes: “In a sense we’re going to find out in the next year or so how many people have got the money to pay them off, and how many people won’t and will have to pay the fees, which are quite considerable.”

She identifies two types of potential Help to Buy borrowers: “We’ve always had this perception of Help to Buy equity loans which is that there’s a group of people who’ve benefited from them who could have bought a property without their help, have probably done quite well, probably [have] quite high income[s] and will probably pay off the loans and never pay the fees – that’s one cohort.

“But there’s also a group of people who used Help to Buy equity loans who genuinely were on the margins of home ownership, probably weren’t [paid] that high [an] income, probably haven’t seen their incomes rise that much in the last few years and they’re probably the ones who are not going to be able to pay the loans off very easily and who are going to be hit harder by the fees.”

Loan versus Isa

So, how does the Help to Buy equity loan dovetail with the newer Help to Buy Isa?

Richard Bradley, head of data at Boring Money, thinks: “There is a fair bit of complexity around how the different schemes overlap. It’s possible to use the Help to Buy equity loan in conjunction with either a Help to Buy Isa or a Lifetime Isa, combining a government bonus and loan. 

“However, the equity loan can only be used on a new build, while the Isas can also be used on existing properties. The equity loan can also be used by those who’ve owned property before, unlike either of the Isas.”

He adds: “Also, buyers can’t use a bonus on a Help to Buy Isa and a Lisa at the same time. However, there is no exit penalty for a Help to Buy Isa, so cash could be withdrawn and used to contribute to a purchase without the bonus, while using the bonus from a Lisa.”

Mr Hall explains: "The Help to Buy Isa was only created to support the purchase of a property and will have no impact on the repayment of the Help to Buy equity loan itself.

"The Help to Buy Isa is available to all first-time buyers that are saving for a deposit. It essentially acts as a helping hand, as it can boost a borrower’s savings by 25 per cent. For every £200 an individual saves, for example, the government will contribute a bonus of £50 up to a maximum of £3,000.”

As Mr McCoy points out, both Help to Buy products offer first-time buyers “the push they need to get onto the property ladder”.

eleanor.duncan@ft.com