Getting onto the property ladder is expensive and difficult. One of the areas where this is most apparent is, of course, the capital city: London. Many professionals and families are forced to either live elsewhere or rent until they’re much older than British people have typically done in the past twenty years. Luckily, this did not go unnoticed by the government and various schemes have been implemented to help people to afford their first property. These include Help to Buy ISAs and loans and the share to buy scheme.
Recently, however, it has also been brought public attention that a considerable number of the property owners using the scheme to help them to purchase property were not those for whom it was intended to help. The future of the Help to Buy scheme was called into question last month after it was found that in some cases those taking out the loans were revealed to have six-figure salaries. What is more, news releases state that almost 20% of people with the loans were upgrading to a larger home rather than buying their first property – which is not how the loans were intended to be used or who they were created for. In this post, we look into exactly why the scheme was created and current speculation over whether or not it is here to stay.
Help-to-buy loans versus ISAs – what’s the difference?
The Help-to-buy scheme was launched by David Cameron in 2013 in a bid to help people onto the property ladder in the expensive market climate and increase the number of new homes being built. If you are looking to purchase a new-build and expect to be in a better financial situation in five years time, the Help to Buy Loan is a good option. You can borrow 20% of the property cost from the government. This leaves 5% and 75% of the deposit and mortgage cost respectively for you to pay for now. You need to have paid it off after 25 years.
The Help-to-buy loan can be a good option if:
- you would like to buy a new-build property from one of the house builders registered with the Homes and Communities Agency HCA
- you find a new-build help-to-buy home that you wish to buy
- you need the 20% equity loan (40% in London) from the government in order to complete the purchase
It is not an option if:
- you do not wish a new-build help-to-buy home
- (and should not be an option if) you do not need government help
For those falling into the first category, these loans are not the only option available. Other options are help-to-buy ISAs. These can be used to save money for a property deposit. The state add 25% tax-free to whatever is in your ISA so long as you use it to buy a home. Unlike the government bonuses paid into both help-to-buy and lifetime ISAs – the help-to-buy equity loan is not free money.
Although there’s no interest on the loan during the first five years, after this time, interest starts to be charged and you have to pay a £1 management fee from the start. Loans are more of a risk than ISAs because if the value of the property’ increases, so does the amount of money that you have to pay back when you either sell the property or decide to make a repayment voluntarily (for which there is a £200 administration fee). Interest rates on help-to-buy mortgages are also higher than those for a standard mortgage.
The future of Help to Buy
In their infancy, the help-to-buy equity loans appear to have served their purpose by restoring confidence in property developers and fostering a pickup in construction projects. Between its launch in 2013 and the end of March 2018, the scheme has helped approximately 169,102 people to buy a home.
Despite this, the main concerns of the recent critics are that the scheme is inflating property prices and builder profits, helping people with high incomes to upgrade their homes and costing the government a lot of money in the process. While the scheme has certainly helped first-time buyers with around 8 in 10 help-to-buy homes going to people taking their first steps onto the housing ladder, it has also benefited upsizers and buyers with large incomes. Government data revealed the average household income of those benefiting to be as high as £50, 000 outside of London and £72, 000 in London. It has been argued that the scheme does not have a large enough market to impact prices. However a report by think tank The Resolution Foundation revealed that new-build prices have increased significantly since the scheme was introduced, faster than those of existing resold property.
Those who have already taken the loan should not be too concerned – it is unlikely that the scheme could be phased out quickly given the disruption that terminating it with insufficient notice would cause. The help-to-buy equity loan scheme is currently set to run until 2021 and at the moment this is all that the government have confirmed. It could be scrapped entirely after March 2021, extended with different rules and possibly a different name such as only allowing applicants with lower incomes. Current speculation is that it will be replaced by a scheme more targeted at those it is meant to be helping.
In any case, if all of this seems too uncertain for you, there are alternative options when buying your first home:
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