Over the past few years, many potential homeowners who struggled to make it onto the housing ladder looked at the Help-to-Buy scheme as a way out of the rental cycle. Years of rising rents and increases in the cost of living all while trying to reach the ever moving target of a minimum 5% deposit. All this before they can realise the dream of becoming a homeowner.
Help-to-buy handcuffs for homeowners
More recently homeowners, who were sold on the dream that ‘Help-to-Buy’ was the best path forward, have come to realise that the dream was an illusion and they have entered into an agreement with the devil. The belief that after the initial five-year interest-free period, the deal would revert to an affordable repayment loan with low interest has been proven not to be the case.
Even the savviest homebuyers appear slightly confused once the details are explained. If that is the case, it begs the question; was the mortgage advice given at the time clear, fair, and not misleading?
Who could have known house prices would rise by an average of 23% in the last 5 years? But how will this impact the homeowner?
Firstly, I’m struggling to think of an investment repayment vehicle that would not only give a return to repay the capital but also provide enough capital growth to meet interest payments of 1.75% (which will go up each year by the Consumer Price Index, plus 2% each year thereafter and any fees that would be due). There is also the potential for the outstanding loan to rise significantly as this is not fixed.
The punches keep coming.
Lack of flexibility for new homeowners
In order to capital raise (take a second charge mortgage increasing the debt), affordability checks will be carried out by the lender, whether it be to add an extension on your home or consolidate debts, as long as you pass affordability, taking a second charge loan against your property should be straight forward if there is sufficient equity within the property.
However, if you have a ‘Help-to-Buy’ scheme in place, a second charge lender is likely to decline a loan application.
Need more space? Do you improve by building an extension? You may need permission to make alterations, increasing the value of the home and thus the value of the property.
Do you really want to inflate the value of your home? Want to take a secured loan to create that additional space? You will likely find the computer says “no.”
Do you move? Remember 20% of the gain and ‘Help-to-Buy’ scheme loan, needs to be repaid, will the dream of moving to a bigger home for a growing family evaporate when the realisation that entering into this agreement is more of a millstone round your neck than you had ever dreamed. Even if you repay the scheme, you may also be kissing goodbye to a lower ‘Loan to Value’ and thus may pay slightly higher interest rates on your next mortgage.
Cost of living and inflationary pain
So, you’re five years into your ‘Help-to-buy’ scheme, only to discover, that the interest-free period was not so generous and you now have 20 years to plan your next house move or come up with some miracle plan to repay the ‘Help-to-Buy’ scheme. If you thought raising a 5% deposit was hard, try paying back a minimum of 10% of the market value.
With rising interest rates do you, make capital repayments off your mortgage or reduce your ‘Help-to-Buy’ scheme loan?
The amount you repay is not fixed; we predicted the galloping inflation we are now experiencing. We predicted the collapse in Bitcoin, and we are also predicting a collapse in the housing market. What a fantastic opportunity to get your ducks in a row ready to repay this awful scheme, which deserves no better place alongside yet another awful product, you guessed it Equity Release.
The realisation by the ‘House of Lords’ committee, published in January 2022, suggested that buyers would have been in a better position had the scheme not been introduced. The Financial Conduct Authority also suggested that those using ‘Help-to-Buy’ are at greater risk of falling into negative equity if property prices start to fall.
Have a question about the content of this column, you can get in touch with David at woodwardfinancials.co.uk
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About the Author / David Woodward
