We have a big enough deposit if we use the Help to Buy scheme, but have read so many negative articles about it
Q I am a 25-year-old teacher and live in Kent with my boyfriend who is a PhD student. We rent a shoe box at a cost of £600 a month, which allows us to save towards a deposit to buy a house. It will soon be enough if we were to buy using the government Help to Buy scheme. However, I have read so many articles about the negatives of this policy I am doubting whether this is a good idea. My question is, should we buy a house now with only a 5% deposit and accept government help, or should we wait? Saving for a 10% deposit will probably take us another five years, and we are keen to start a family in our own home – but I’d rather wait if the financial implications of using Help to Buy are very risky. KW
A There are two main criticisms levelled at the government’s Help to Buy scheme, which was announced in this year’s budget. First, that it will push up house prices, thus making property even less affordable to people trying to get a foot on the property ladder. The second criticism is that because it encourages people to take out a loan equivalent to 95% of the value of a property – made up of a 75% loan from a lender and 20% from government – borrowers will be at risk of negative equity if property prices subsequently fall, especially if they buy at an inflated price in the first place. Negative equity is where your property is worth less than the amount of your mortgage meaning you wouldn’t be able to pay off the loan if you sold the property.
However, negative equity is a problem only if you want to move or remortgage, so if you plan to be in the property for some time the possibility of being in negative equity may be a risk you are prepared to take.
The advantage of using the Help to Buy scheme is that for the first five years of the loan you pay no interest on it. After the five years are up you will pay a fee of 1.75% of the loan, which will increase every year by 1% plus RPI. However, you are also allowed to pay the government loan back early, thus increasing the amount of the property you own and reducing the risk of negative equity. You can either pay off the whole lot or instalments of either 10% or 20% of the total amount.
So instead of waiting the five years you say it will take you to save up for a 10% deposit, you could buy now using Help to Buy and use those five years to save up enough to pay off a portion – or all – of the government loan before you have to start paying the post-five-year fees. It’s also worth noting that if the Help to Buy scheme really does inflate house prices, by waiting five years before you buy you run the risk of not actually being able to save enough for a 10% deposit, because you’ll need a bigger amount than you now need.
But one big question you need to answer is: do you want to buy a new-build home? If you don’t, the current Help to Buy scheme is not for you, as it only applies to new-build properties. However, provided you have a deposit of 5%, both new and older properties will be eligible for help when the second leg of the Help to Buy initiative is introduced in January 2014.
It is slightly different from the current scheme in that rather than granting you an interest-free loan, the government guarantees 15% of your mortgage. This is supposed to encourage lenders to provide bigger mortgages than they normally would to someone with a 5% deposit. But the government can’t guarantee that taking out a 95% mortgage doesn’t run the risk of someone falling into negative equity.
Finally, nothing in either of the Help to Buy schemes changes lenders’ mortgage lending criteria, so depending on how your boyfriend’s studies are funded, the fact that he is a PhD student may work against you when getting a mortgage. But If you are planning to apply for a mortgage on your earnings alone, this shouldn’t be a problem.
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