In February last year we posted a Top 10 Things You Didn’t Know about Help to Buy and how the model has evolved since 2013.
Now in 2020, there is another update that you probably did not know about – so we are here to help again. In April 2021, the government’s Help to Buy scheme is changing and will be exclusive to first time buyers.
What we often find with the introduction of new schemes, is that there can be a lack of clarity and direction – especially if you are new to the market. To help clear things up, Rebecca Fulton, Associate Director at PLS, has provided her insight into the new Help to Buy scheme and what to look for.
What is Help to Buy?
Rebecca: Help to Buy is a government scheme launched over 5 years ago to help those struggling to buy a house get on the ladder. Back in 2013, the UK was facing a housing shortage with the majority of first-time buyers priced out of the market. This scheme has effectively been a ‘hit two birds with one stone’ sort of option as it only includes new builds. The emphasis being on the builders and contractors to take up the scheme, build more houses and get those struggling onto the property ladder once and for all. The new scheme in April 2021 will make Help to Buy only open to first time buyers and the government plans to completely end the scheme by 2023, meaning there are only about 2.5 years left of Help to Buy!
What are the practicalities of the scheme?
Rebecca: Essentially it gives those struggling to find an acceptable deposit an extra helping hand. Once a buyer has reached a minimum of 5% for a deposit on their own, the government then provides an equity loan for up to 20% of the property value which goes up to 40% for properties in London. This provides much needed help to first time buyers looking to purchase their first property.
How do people pay back the loan?
Rebecca: The best thing about the Help to Buy is that you don’t have to pay anything back for the first 5-years – well, not quite. You do have to pay £1 a month to keep your details up to date with the government but those first 5-years are there to give you a bit of breathing space. After that, the loan is subject to an additional interest fee of 1.75% per annum on the outstanding amount then rising each year by the increase in RPI plus 1%. This means that after the 5-years is up to you will only be paying back repayments on the interest, so if you’d prefer to pay off the capital then it might be better at looking to pay it off sooner and look into early repayments.
Anything to think about?
Rebecca:It just depends where you want to buy really, the scheme is available in England and Wales, although the process in Wales is slightly different. How much you can spend on a new property will depend on where in the country the property is. The Government set a price cap on the amount that you can spend under the scheme so for example in London the maximum purchase price is £600,000 whereas in the North West the maximum you can spend it £224,400. The thing to consider, as well, is that this is a scheme managed by the Homes and Communities Agency, so it’s another body that will have an interest in your mortgage. This can make the administration more lengthy on the solicitor’s side, and also add a small price to the package, usually under £200. It’s also dealt with directly by the builder of the house, so you will never see that extra 20% or 40%, it goes straight to them which means that you need to check that they offer the scheme before you buy.
Once you have a 5% deposit saved up you can gain up to an additional 20% of the property price (40% in London) from the Help to Buy to give you a helping hand.
10 things about Help to Buy you may not know!
- The current Help to Buy scheme ends on 31st March 2021, and a new one starts in April 2021. The new scheme will only be open to first time buyers, as currently it is open to home-owners as well and expected to end by 2023. This means if you are not a first time buyer and looking to use Help to Buy, your transaction will have to be completed by 31st March 2021, otherwise you will not be eligible. This is the biggest change that you will need to be aware of.
- How much you can spend on your new home, will depend on which region of the country the property is in. Full details of the price caps for each region of the country can be found on the Help to Buy website: https://www.helptobuy.gov.uk/equity-loan/help-to-buy-equity-loan-2021-2023/
- You need to remember that this is a loan and you are expected to pay interest payments after 5-years, but that doesn’t stop you from paying back all or part of the loan if you have the funds.
- If you sell the property, you will have to return the Help to Buy money in a lump sum.
- The Help to Buy scheme is fixed against a percentage of the house price, so if your house rises in value expect to pay more, equally if it drops for whatever reason you will pay less.
- You can use the Help to Buy scheme more than once as long as you have no other interest in any other property at the time you use it. We’re seeing people now at PLS who have bought a new build via the scheme, sold it and are now using the scheme again. But don’t forget, the rules change on 31st March 2021 and after this date you will only be able to use the scheme if you are a first time buyer.
- You can ONLY buy a new build using the Help to Buy scheme.
- You can combine a Help to Buy ISA (where users pay money into an ISA and are then given a cash bonus from the government when purchasing a property) with the Help to Buy scheme to maximise the amount of money available.
- There will be extra paperwork to sign if you are using the Help to Buy scheme and be prepared to pay slightly more in fees when using a Help to Buy scheme, as there are more checks needed when dealing with a third party (the Homes and Communities Agency).This could potentially be around £200 extra.
- Make sure your builder is registered in the Help to Buy scheme before you agree to purchase the property, or you won’t be able to use the scheme. This also doesn’t stop you agreeing to specific deals or rates with them directly if you want to negotiate further.