Under the scheme, which launched in 2013, the Government provides a loan of up to 20 per cent of the purchase price of a property to help buyers struggling to raise the full deposit.
However, due to higher average house prices in the capital, the potential government contribution towards a London home was increased to 40 per cent in February 2016, since when 83 per cent of the total number of Help to Buy Equity Loan purchases in London have been made, according to the Ministry of Housing, Communities & Local Government.
The majority (77 per cent) of London buyers after February 2016 used the full 40 per cent equity loan, while only two per cent of homes were bought using a loan of less than 20 per cent.
How the sums stack up for London buyers
Currently, a London buyer spending the maximum £600,000 allowed would need a £30,000 deposit, their Government loan would be for £240,000 and they would require a mortgage of £330,000.
While the scheme has been lauded for helping struggling first-time buyers, there are no limits on who is eligible to buy, only on what they can purchase using the loan. This is set to change next year when the scheme will be limited to first-time buyers only.
The average household income of Help to Buy Equity Loan applicants in London is just over £70,000. However, 12,734 households with an income of over £100,000 have also taken advantage of the scheme.
“Five per cent of properties funded by Help to Buy have been for £500,000 or more, with five per cent of buyers also earning £100,000 or more. In these instances, you have to argue that the use of the scheme is unnecessary and simply fuels luxury purchases at the expense of the taxpayer,” said Marc von Grundherr, director of estate agents Benham and Reeves.
The government has spent £16.05 billion on the scheme since its inception.
How the Help to Buy Equity Loan works
The scheme can be used to buy a new-build property costing up to £600,000 with a maximum loan in London of £240,000, or 40 per cent of the sales price. The buyer must contribute a cash deposit of at least five per cent and get a mortgage on the remainder of the sale price.
There are no fees or interest to pay on the government loan for the first five years. After this, the loan will start accruing interest and the buyer must start to pay the Government back.
When the home is sold, the Government recoups the same equity share of the property as was originally lent – so if the Government contributed 40 per cent of the value to buy a new home, the owner will repay 40 per cent of the value at the time they sell.
It must be the buyer’s only property and cannot be rented out. It must also be advertised as Help to Buy by a developer registered under the scheme. Find out how to apply here.
The current Help to Buy scheme runs to March 2021, when the replacement, restricted to first-time buyers only, will come in and run until March 2023.
What are the downsides of the Help to Buy Equity Loan?
A recent report from the Financial Conduct Authority warned that buyers using the Help to Buy Equity Loan are more likely to face negative equity if property prices fall.
This is due to the premium buyers will have paid for a brand-new home, which is estimated at as much as 20 per cent.
Unless local house price rises outpace this, new-build homeowners could end up selling their home for less than they originally paid for it.
The report also said that these buyers were potentially more exposed to changes in economic conditions and could have fewer remortgage options available to them.
How does Help to Buy compare with first-time buyer mortgages?
Once the government loan starts charging interest after five years, the annual percentage rate is expected to be 5.2 per cent. This will be payable in addition to the mortgage.
Meanwhile, first-time buyer mortgages from TSB and HSBC are currently on offer with 3.4 per cent APR, making monthly repayments significantly cheaper.
Craig Hall, head of broker relationships and propositions at Legal & General Mortgages says: “[The] news that the Government is drawing up plans for an extension to Help to Buy will give developers much more certainty around which planned sites will still be eligible for the current scheme. This will be particularly important as many housebuilders will be revising their timetables for completion in light of the impact of the COVID-19 lockdown.
“An extension will also help to support the growing demand for Help to Buy amongst homebuyers, including buyers with smaller deposits who now face a much more limited choice of high loan-to-value mortgages. These buyers are seeking out the support of independent mortgage advisers to find alternative solutions and Help to Buy is one route that a growing number of buyers are planning to use. In fact, our research shows 13% of first-time buyers now plan to use the scheme, who previously hadn’t considered Help to Buy before the current crisis.”