How the Government can help

There seems to be little doubt that it has become extremely challenging to make that first step on the ladder. To help, the government has created a scheme to aid first time buyers. Applying exclusively to new builds the ‘help to buy scheme’ offers its recipients a loan of 20% towards any property outside of London and 40% in Greater London (where property prices are substantially higher.) The property can cost up to £600,000. With the support from the government a first time buyer would have to contribute only 5% as deposit with 75% being covered by a mortgage.

To break it down, this is how a £200,000 purchase would be divided: :

Self-funding by buyer (deposit): £10,000

Governmental equity loan: £40,000

Mortgage: £150,000

Note: an additional allowance needs to be made for Stamp Duty and other relevant fees where appropriate. (hyperlink to relevant pages)

Benefits:

  • Means purchasing a house is far more affordable
  • You won’t be charged any interest on the government loan for the first five years of owning the house
  • Reduces the annual salary you need to qualify for a mortgage
  • Could encourage more new builds and relax the rising cost of housing
  • You can pay the government back early and thus reduce the amount of interest you need to pay

Drawbacks:

  • Not fully owning your house can have later ramifications
  • Means you won’t be able to remortgage
  • Under the guidelines you are unable to sub-let your home
  • It must be your only property.
  • Interest (after the first five years) is set at 1.75% of the loan’s value, after which it increases annually and this doesn’t count back towards paying the equity loan.
  • You must pay back the loan after 25 years or when you sell your home
  • The loan you are given is what’s known as an equity loan. This means the amount owed is dependent on the value of the property. In fact, if the scheme allows more people to afford to buy a property then  there could be an impact on rising house prices leading to higher demand and higher prices.
  • Interest fees are always subject to change and borrowers should always account for rates going up when calculating the affordability of a loan.
  • Not all mortgage companies will loan to applicants who are using the help to buy scheme and some companies will adjust loan amounts for those using it.
  • To calculate the cost of repayments your property will need to be independently valued. You may be expected to cover the cost of this.
  • You will pay all of the Stamp Duty whilst only owning 80% of the property
  • You may well risk negative equity if the price of property falls