While the Help to Buy mortgage support scheme has been tapering for a few years (Help to Buy ISAs closed in 2019), the remaining equity loan system will end in March 2023.
Applicants can still apply for a Help to Buy loan until 31st October 2022, but the five-month deadline may be unrealistic for first-time buyers hoping to purchase their first property.
Interestingly, the original deadline was December 2022, but scheme operator Homes England has brought this forward by two months.
Today we explain how Help to Buy works and discuss the alternatives for first-time buyers finding it tough to get onto the property ladder.
Help to Buy Equity Loans
Help to Buy equity loans were introduced in 2013, aiming to help people buy a first home with a more substantial deposit.
The loan scheme allows first-time buyers to apply for up to 20% of the value of the property purchase (40% in London), although they must have a 5% deposit – the loan is combined with the 5% down payment to present a 25% deposit paid to the mortgage lender.
Loans are interest-free for five years and then attract interest of 1.75% in year six, rising annually in line with inflation plus 2% until the borrower repays the debt.
Once the homeowner pays off their mortgage, reaches the end of the mortgage term or sells the property (normally after 25 years), they must repay any outstanding balance based on the market value and proportion of equity used as loan security.
Partial payments are permitted of at least 10% of the property’s market value, so it is possible to repay the loan gradually.
Application Deadlines for Help to Buy
There are several cut-off dates to be conscious of if you hope to complete a Help to Buy mortgage application before the scheme ends:
- Property reservations and an equity loan application must be submitted by 6 pm on 31st October this year.
- Applicants must have presented a Property Information Form to their Help to Buy agent by the same time.
- Builders must construct new-build homes that are available to move into before 31st December 2022 (referred to as practical completion). House builders will be able to confirm whether this is possible.
- Purchase transactions must be legally complete before 31st March 2023, when the scheme fully winds down.
First-time buyers who miss any of these deadlines will not be able to proceed and will not receive the equity loan since extensions have been ruled out.
How Will the Closure of Help to Buy Impact First-Time Buyers?
There are several conflicting schools of thought, with some happy that Help to Buy is closing – it is routinely criticised for artificially inflating new home prices, with a proportion of the benefits passing directly to developers rather than buyers.
Builders can charge up to 5% more as a ‘Help to Buy surcharge’, making it more challenging for other buyers to purchase a new home, with or without any mortgage support.
Help to Buy is also very limited and only available to new-build properties and first-time buyers, with the drawback that new homes do not appreciate at the same rate as older residences.
In essence, a newly built property might sell with a premium of up to 16%.
Still, that additional perceived value is lost quickly, resulting in slower value growth and stagnation within the property market.
A buyer who invests in a new build through Help to Buy can, in real-world terms, pay up to 21% more than for a comparable home and may find that it takes longer to repay their mortgage or accumulate sufficient equity to upgrade to a larger property.
Alternative Support Schemes to Help to Buy
There is no like-for-like replacement that will take over from Help to Buy, although Lifetime ISAs have replaced the previous Help to Buy ISA program.
Lifetime ISAs are designed to help savers amass greater wealth for a home deposit or retirement, with a 25% contribution to savings, subject to annual deposit caps.
Buyers can open a Lifetime ISA and begin making deposits, with the top-up applied annually.
However, Lifetime ISAs have not proven particularly popular, perhaps because just 13 providers, with only three supporting a cash-based savings product, offer them.
In terms of mortgage support products, there are several alternatives:
- The Mortgage Guarantee Scheme guarantees 95% of mortgage borrowing, provided you have a 5% deposit (as with Help to Buy). The benefit is that a lender will be more likely to offer favourable terms and accept a lower deposit with this governmental assurance. Participating lenders will consider applicants buying a property worth £600,000 or less, and existing homeowners can apply.
- Shared Ownership involves buying a proportion of a property (between 10% and 75%), with the balance owned by a local housing authority. Buyers must meet maximum household income limits and provide a deposit of between 5% and 25% of the property share they purchase.
- First Homes is a newer initiative, supporting first-time buyers and key workers with discounts of 30% to 50%, depending on the region. Only first-time buyers can apply, with a household income limit of £80,000 (£90,000 in London) and property caps of £250,000 after the discount, or £420,000 in London.
First Homes only applies to new builds, with developments on various UK construction sites managed between housebuilders and local authorities.
The caveat is that local councils may set different property price or income caps, limiting availability.
Buying a First Home After Help to Buy Closes
It is possible to apply for a first-time buyer mortgage without a support scheme since several lenders offer 95% mortgages, depending on your circumstances and the value of the property in question.
You can find further guidance about Mortgage Guarantees, Help to Buy, Shared Ownership and First Homes through the Think Plutus site, including the pros and cons to be mindful of before picking a scheme to apply for.
The takeaway is that several initiatives may help you buy your first property, although the most suitable options will depend on your circumstances.
Please contact Think Plutus at your convenience if you would like independent guidance about any of the information within this article or advice about using Help to Buy before the scheme closes later this year.