With a help to buy equity loan the government lend you 20% of the purchase price of a newly built home, so you only need to put a 5% deposit down and obtain a mortgage of 75%. This initially seemed like a great idea helping those who would otherwise not be able to afford to purchase a new build property. Unlike the Help to Buy ISA’s the government have offered, the help to buy equity loan is available to home movers as well as first time buyers looking to purchase a newly built home up to £600,000.
I do believe that for the right people the loan scheme is a great idea, but I also see the potential problems that this could have for others. For example a couple who have just started training in a profession who will definitely have significant salary increases in the future, this scheme makes sense for them. In the future they will have increased affordability in terms of obtaining a mortgage with the larger salaries they will receive. Therefore by receiving the equity loan in the early years of their career it enables them to purchase a property that they might otherwise have had to wait years for, saving a larger deposit or waiting until fully qualified.
In this example, once the five year interest free period ends the couple would then be in a better position financially and ideally be able to remortgage for both the remaining mortgage balance and the equity loan, so that the property is fully owned by themselves going forward. If however the financial situation has worsened since taking out the equity loan the home owners may not be able to pay back the equity loan and at this point would have to start paying interest payments.
For the first year this would be an interest rate of 1.75% of the original equity loan amount, however following on from this the interest rate increases each year by the amount RPI has increased plus 1%. The fact that the interest rate is an unknown to me is a worry, most personal loans you get have a fixed interest for the term however you are essentially taking out a loan with an unknown future interest rate, which however much it rises you are obligated to pay.
Even if you can afford at year five to remortgage and pay back the equity loan, another issue you could face is the fact that new build homes are often over priced from the start, losing value as soon as you move in as they are no longer “brand new”. This can become an issue when remortgaging if the property is not valued at at least its original purchase price you could struggle to have enough equity in the property with only the original 5% deposit and capital repaid over the first few years. Therefore it is always best to seek independent financial advice when considering the help to buy equity loan scheme as an option.
Sammy McCann BSc (Hons), Cert CII (MP)
1st April 2019