Help to BuyMay 30 2018

Help to Buy can benefit buyers who have done their research

  • Understand the workings of the Help to Buy scheme
  • Grasp the challenges of using Help to Buy
  • Understand the risks of taking on a Help to Buy loan
  • Understand the workings of the Help to Buy scheme
  • Grasp the challenges of using Help to Buy
  • Understand the risks of taking on a Help to Buy loan
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Help to Buy can benefit buyers who have done their research

With the Help to Buy scheme, the government puts in 20 per cent and the borrower only has to find a deposit of 5 per cent. This means on the same property, the borrower pays a deposit of £8,980 but is left with a much lower mortgage – £134,696 and therefore a better loan-to-value and consequently a lower mortgage rate. So, not only is the main mortgage lower, but the client also gets a more competitive rate of interest. 

You can borrow interest-free for five years

Buying a home is obviously an expensive business, but it does not stop once the contract is signed and the house is bought. There are all sorts of other expenses in the first few years of owning a new home, and the fact the government portion of the loan is interest-free for five years can be very helpful.

However, while the Help to Buy scheme gives those who could not otherwise afford to buy the opportunity to do so, there are drawbacks, and advisers must ensure their clients have carefully considered these before committing to a loan.

The loan gets more expensive

The interest on the government portion of the loan is quite low when it becomes due: 1.75 per cent. However, after the sixth year, the rate starts to increase. The borrower needs to have budgeted for this, which is what the first swath of Help to Buy borrowers are facing right now. 

This sudden introduction of charges can cause problems for those who are unprepared

While the interest-free loan seems very attractive at the time, once the borrower has to start paying it back, interest will increase by 1 per cent plus any increase in the RPI each year. So even if the RPI falls at any time, charges on the government loan will still increase by at least 1 per cent, which on a £40k loan is at least £30 a month more each year. This ever-increasing cost is something potential buyers need to be aware of and prepared for. 

It is therefore vitally important that advisers make it clear to their clients looking to use Help to Buy that the loan is not interest-free indefinitely, and make sure they are in position to put money aside to prepare themselves financially for when the loan does need to be paid back.

Uncertain future

Not all lenders will lend on Help to Buy, which means that when a client does come to the end of their deal, their options may well be restricted. This, combined with the rising costs of the government part of the loan, means clients need to be cautious.

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