Changes to the mortgage landscape
One of the massive impacts of COVID on the housing market was the withdrawal of most (all?) 5% mortgages that would have previously helped First Time Buyers out a lot. You now commonly need at least a 10% deposit to get a mortgage. Add that to the increase in house prices, and the situation doesn’t look great. So now what?
Help to Buy Equity Loans
The government has run the scheme for a long time, and it can get overlooked as it only applies to new builds. Be aware that it is specific to ENGLAND – check other government sites if you live in Wales, Scotland or Ireland.
In short, this scheme lends you up to 20% of the cost of your new property (in London even 40%) and you are expected to pay 5%. So as long as you can scrape together 5% for the deposit, this scheme opens up a large range of mortgages for you. For example, if you take the 20% government loan, you will be able to get a mortgage based on a 25% deposit (75% loan-to-value, LTV), with attractive conditions.
To be eligible, you have to satisfy the following criteria:
- Have a 5% deposit saved up
- Not own any other property or enter a part exchange deal on your old home
- Not sublet or rent out the property after you buy it
The scheme is outlined here: https://www.helptobuy.gov.uk/equity-loan/equity-loans/
This scheme is also ending (we already kissed goodbye the Help to Buy ISA…), with applications and the whole purchase process having to be complete by 31 March 2021, although there are some allowances for delays from COVID.
From April 2021, the scheme will be replaced by a revised scheme that has made changes to the maximum purchase price, interest, more strict definition of First Time Buyer etc. Information about this new scheme is here: https://www.helptobuy.gov.uk/equity-loan/help-to-buy-equity-loan-2021-2023/ and here: https://www.moneysavingexpert.com/mortgages/help-to-buy-equity-loans/
The new scheme will end in 2023 and it is not clear what will come after that.
What does it cost?
You should have a good idea how you want to pay the loan back, as this will be a payment you have to factor in on top of your mortgage payment. The loan is free (aside from a £1/month admin fee) for the first 5 years and you will start to incur interest from year 6 onwards. This is where it gets sketchy: the interest starts at 1.75% and increases by 1% every year. So the longer you take to pay the loan back, the more expensive it gets. At the same time, because you are paying off your loan, the interest is on a ever decreasing amount. As an example, in year 10 you might pay 5.75% on an outstanding £4,000, which is £230 annually.
In practice, you can easily calculate how much it will cost you monthly to pay back the loan within 5 years: just divide the amount you are planning to borrow by 60 (12 months * 5 years). So for example, if you are looking at a £200,00 new build:
- Your own deposit savings have to be £10,000 (and have another £1,500 at the ready for solicitor, survey etc. plus budget for a reservation fee of around £500 for the new build)
- The government will loan you £40,000 to make up a deposit of £50,000 in total (25% of the property value)
- To pay back the £40,000 over the next 5 years, you will have to pay £667 monthly. As you can see, this is a big commitment. If you cannot afford it, see whether you can stretch it over a longer period and whether you are comfortable with the additional interest payments.
New Build warning
If you consider buying a new build, please carefully read the tips in the book and check across the web if you like. There are lots of issues with new build including snags, poor build quality, delays and sometimes dodgy contracts extorting monthly fees. Check very diligently before you commit.
Quite timely for the above warning, four major developers might find themselves in court over mis-selling leaseholds: https://www.bbc.co.uk/news/business-54023631
To find out more, check out the following sites:
- Government Help to Buy equity loan info page: https://www.helptobuy.gov.uk/equity-loan/equity-loans/
- Help to Buy loan and mortgage calculator on WHICH: https://www.which.co.uk/money/mortgages-and-property/mortgage-calculators/help-to-buy-calculator-akj3c0y9b7u1
- Excellent guidance on Moneysavingexpert: https://www.moneysavingexpert.com/mortgages/help-to-buy-equity-loans/