Tue 18 Apr 2017 View all news articles

What do you do if you want to get out of Help to Buy?

More than one million people have taken advantage of the Government's Help to Buy schemes since their launch with a quarter of those actually taking their first step onto the property ladder as result.

The latest figures show that more than 259,000 people have bought a home using a Help to Buy scheme, while over 868,000 aspiring homeowners have opened a Help to Buy Isa in order to benefit from free cash bonuses of up to £3,000 towards building a deposit to buy. 

The schemes have undoubtedly been helpful for many - but there remain questions over what happens, having bought your first home with Help to Buy, when you want to sell it in order to move up the ladder.

Michelle Niziol, a contestant on the BBC's The Apprentice in 2016 and director of mortgage brokers IMS Independent Property Solutions, outlines what your options are if you've bought through Help to Buy.

How it works: Help to Buy equity loan
Help to Buy equity loans are only available to people who want to buy a new build property. The scheme allows you to put down a deposit of at least 5 per cent with the Government lending you up to 20 per cent of the property's value as an equity loan. You take out a mortgage on the rest of the property's value.

If you wanted to buy a house for £200,000 with a 5 per cent deposit you would need a:
- £10,000 deposit
- £150,000 mortgage loan
- £40,000 loan from the Government

Buyers in London can borrow 40 per cent of the property price from the Government rather than 20 per cent.

How does the equity loan element work?
The equity loan given to purchasers as part of the scheme is interest free for the five years. From year six you will pay 1.75 per cent interest and every year onwards the loan will increase by 1 per cent plus any increase in inflation measured by the Retail Price Index. The latest figure for this was 3.2 per cent in February 2017.

You will need to repay the equity loan in full after 25 years, when your mortgage term finishes or when you sell your home – whichever happens first. You can also choose to repay part of the loan early in chunks of either 10 per cent or 20 per cent of the total value of the property.

The loan is not a fixed monetary amount but a percentage of the purchase price of the property. So if the price of your property increases, so does the loan and the amount of money you will have to pay back.

Selling your property
You are able to sell your property but it is important to remember that you will need to factor in the amount of money owed on the equity loan. 

If the loan outstanding is 20 per cent, you will need to pay back 20 per cent of the profit from the sale of the property.

Whilst the equity loan means that your mortgage is smaller than it would have been if you were buying a property using a conventional mortgage, it may make it harder for you to move on because you have to factor in the cost of paying the loan back.

Remortgaging
We are now starting to see the first wave of Help to Buy equity loan borrowers coming to the end of their initial mortgage term and looking to remortgage.

There is a lack of availability of specialist equity loan mortgages to move on to at the moment but we have been able to switch clients to lenders' conventional mortgages through higher loan-to-value products.

If you have been able to pay down the equity loan and seen your property increase in value, thus increasing the equity you have in your property, then you are in a good position to be able to remortgage onto a conventional mortgage product. 

The more equity you have in your property, the greater the range of mortgages available to you.

If seen little increase in the property’s value, you may struggle to gain a conventional mortgage because of the little equity you have in the property

We have assisted a number of clients who have been looking to repay the equity loan in its entirety and we would always encourage clients to do this if they are able to.

However, if you have little savings, have been unable to pay down the equity loan or have seen little increase in the property’s value, you may struggle to gain a conventional mortgage because of the little equity you have in the property.

This is especially true for those who have purchased a new build property through Help to Buy, as these types of homes are typically marketed at a premium price compared to similar properties in the area.

What if I want to stay in my property?
If you wish to stay for longer than five years, you will simply continue to pay your mortgage and the equity loan until such period as explained above.

However, it is difficult to predict what inflation will be in five, seven or 10 years’ time, along with the level of salaries, house prices and interest rates. 

It is best to speak to a mortgage consultant about your options, as well as any changes to your personal circumstances and future plans, as this can impact your ability to pay.

Plan ahead now
Help to Buy equity loan will continue to assist thousands of first time buyers to purchase a home of their own and get on the housing ladder until the scheme closes in 2021. 

However, buyers need to be mindful that at the end of the five years, when they have to begin to repay the equity loan with interest, they may need to move to a cheaper area or downsize to repay the loan.

It is always important to seek advice and guidance from a mortgage consultant about what your options are.

Source: Daily Mail

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