What is the Help to Buy scheme?

The Help to Buy scheme is a government initiative designed to assist first-time homebuyers and existing homeowners in purchasing a new-build property. The scheme launched in 2013 aiming to make homeownership more widely accessible by lowering the financial barriers which prevent many from getting onto the property ladder.

 

Who Benefits from the Help to Buy Scheme?

Primarily, the Help to Buy scheme benefits first-time buyers, offering them a more manageable way to purchase their first home as the average age of first time home owners is increasing. Existing homeowners looking to move up the property ladder can also take advantage of the scheme, provided they are purchasing a new-build property. The initiative is particularly beneficial for those who struggle to save for a large deposit, as it reduces the upfront financial requirements and helps them secure a mortgage with a lower deposit.

 

How Does the Help to Buy Scheme Work?

The Help to Buy scheme offers an equity loan to buyers purchasing a new-build home. The government lends up to 20% of the property's value (or up to 40% in London) interest-free for the first five years.

Buyers will only need a 5% deposit, the remaining amount will then be covered by a standard mortgage lender. For example. If you were purchasing a home worth £300,000, you would need a £15,000 deposit, a £60,000 government loan, and a £225,000 mortgage.

After the initial 5 years, the loan will build interest which starts at 1.75% and increases annually in line with inflation +2%.

The loan must be repaid in full when the property is sold or at the end of the mortgage term, whichever comes first. Repayments are based on the property's market value at the time of repayment, meaning if the property's value increases, so does the amount you owe on the loan.

 

Limitations of the Help to Buy Scheme

While the Help to Buy scheme offers significant advantages, it also has several limitations:

  1. Property Price Caps: The scheme only applies to new-build properties with regional price caps. As of April 2021, these caps range from £186,100 in the North East to £600,000 in London. This can exclude potential buyers in areas where property prices exceed the cap.
  2. New-Build Only: The scheme is restricted to new-build properties, excluding those looking to purchase older homes or resale properties.
  3. Interest Accumulation: After the initial five years, the equity loan incurs interest. This added cost can become a financial burden, especially if property values increase significantly, leading to higher repayment amounts.
  4. Repayment Conditions: The equity loan must be repaid in full upon the sale of the property or at the end of the mortgage term. This repayment is based on the property's current market value, potentially leading to higher repayment amounts if the property has appreciated in value.

 

The Help to Buy scheme is a valuable tool for first-time buyers especially who are looking to build a new build property giving more people a chance to join the property market with lower deposit requirements. There are certain limitations to the scheme which should be carefully considered before agreeing.  If you are trying to save for your first house, then applying for a lifetime ISA may also be beneficial to save up enough money at a quicker rate.