So what is help to buy? It's something we hear about on a regular basis, and has been promoted as a good way to get on the property ladder, but what actually is it, how does it work, and what does it cost...?
Help to buy is a government scheme which has been set up to help first time buyers to get on the housing ladder. The idea is that the government will lend you up to 20% of the homes value. This means that the mortgage amount that you need to borrow from the mortgage company will drop by 20%, which is likely to increase the chances of you being accepted for a mortgage, and/or needing to pay such a large deposit.
You will still need a minimum of a 5% deposit to put towards the property, and together with the 20% loan, you are then putting down a 25% deposit on a house, leaving a mortgage of only 75% of the house cost.
The 20% loaned to you is interest free for the first 5 years, you start paying the loan back in year 6. The interest rate is 1.75% currently, and this is adjusted yearly with inflation. You only pay the interest on the 20% borrowed.
You need to have repaid the loan by the time the mortgage ends, or if you sell the house. If you do sell the house, the government will take 20% of the sale price, no matter if that 20% is higher, or lower, than the loan amount. This works in your favour if the house is worth less than the original sale amount, but against you in the house has increased in value, (as you would hope it would). You can repay the loan back before the mortgage ends, or you sell the house, but the minimum the government will accept as a payment is 10% of the loan.
The maximum house value that you can take the loan out on, is £600,000. Outside of London, the maximum loan amount is 20%, however if you are buying in London, then the loan amount doubles to 40%. Scotland & Wales have similar schemes, although at a lower maximum loan amount.
As an example, lets look at a loan of £200,000 for a property in England, but outside of London.
Under this scheme, you would need to have a deposit of 5% saved up already, so that's £10,000 - The government will then lend you £40,000, which is 20% of the property value, so you now have £50,000 to use as a deposit on the mortgage, which then reduces down to £150,000, meaning your chances of the mortgage being approved increase, and the amount of interest you will pay, over the duration of the mortgage, reduces.
So what will that cost me a month?
Based on a fixed term, 5 year mortgage, on a loan of £150,000 at 2.4%, you could expect to pay:
Years 1 to 5 - £665 a month - having paid no interest on the 20% loan
Year 6 onwards - £723 a month, (assuming that your mortgage interest payment has stayed at 2.4%), which now includes interest at 1.75% on your 20% loan. Remember the loan percentage will increase in line with inflation, year on year, and so in year 10, you could be paying around £735 a month, which isn't a huge rise.
Now remember you are only paying interest on your 20% loan, you still owe the £40,000 to the government, and so until this is paid off, the government own 20% of your house!
This is, in my opinion, a decent way to get onto the housing ladder. If like me, you are stuck in a position where you are renting, then you are already living in a house that you don't own!
I would prefer to be living in a property where every month, I'm paying money to a mortgage company, and owning a little more of the house I live in! If that means that I also owe money to the government, then so be it, I just need to factor that 20% into my maths, if looking to move home in the future, but can relax knowing that I'm no longer paying rent, at a much higher rate than what I would be paying as via the mortgage route, and would have something to show for my hard earned money!