The Help to Buy scheme, introduced by the government to assist first-time homebuyers in purchasing a property, has been a hot topic in the world of real estate. It closed to new applicants on the 31st October 2022, with any applicants needing to complete before 31st March 2023. But with many new homeowners still utilising the Help to Buy scheme, knowing the pros and cons are important. Furthermore, similar government initiatives are likely to arise in the future to promote homeownership, therefore it’s good to evaluate to pros and cons of the Help to Buy scheme to inform future efforts.
Pros of the Help to Buy scheme
1. Lower deposit requirements
One of the main attractions of the Help to Buy scheme was the reduced deposit requirement. Traditional mortgages typically require a 10-20% deposit, which can be a significant barrier for first-time buyers. Under the Help to Buy scheme, eligible buyers needed only provide a 5% deposit, making homeownership more accessible for many.
2. Government-backed equity loans
The Help to Buy scheme offered equity loans, where the government lends eligible buyers up to 20% (40% in London) of the property’s value. This loan is interest-free for the first five years, allowing homebuyers to save on interest payments during this period. The reduced loan amount also meant that buyers could access lower mortgage rates from lenders, as they now posed a lower risk.
3. Mortgage guarantees
Mortgage guarantees are another component of the Help to Buy scheme. The government guarantees a portion of the mortgage, enabling lenders to offer higher loan-to-value mortgages (up to 95%). This makes it easier for first-time buyers to secure a mortgage with a smaller deposit.
4. New-build properties
The Help to Buy scheme focused on newly-built homes, which can be advantageous for buyers seeking a modern, energy-efficient property. New homes often come with a warranty, protecting buyers from potential structural issues, and may also include incentives like upgraded fixtures or appliances.
5. Potential for Capital Growth
Buying a property is a long-term investment, and the Help to Buy scheme brought potential for significant capital growth over time. If the property market grow, the value of the property is likely to increase, allowing buyers to build equity and potentially make a profit when they eventually sell the property.
Cons of the Help to Buy scheme
1. Limited property choices
One major drawback of the Help to Buy scheme is that it primarily applied to new-build properties. This restricts the pool of available homes, as buyers couldn’t use the scheme to purchase older or pre-owned properties. Additionally, new-build homes are often more expensive per square foot, meaning buyers may not necessarily get the best value for their money.
2. Price cap restrictions
The Help to Buy scheme had price cap restrictions, which vary depending on the region. In some areas, the cap might have limited the choice of properties, making it difficult for buyers to find a suitable home within their budget. Each regional caps is available here to see on the government’s website.
3. The risk of negative equity
Negative equity occurs when the value of a property falls below the outstanding mortgage balance. As the Help to Buy scheme involved a higher loan-to-value ratio, there is an increased risk of negative equity if property prices decline. This could create difficulties for homeowners who wish to sell or remortgage their property in the future. Homeowners can understand the value of their property by having an independant valuation carried out. This is a requirement under the Help to Buy Scheme when the owner decides to re-mortgage or sell the property, but it can also be done voluntariliy at any time.
4. Long-term financial implications
Under the Help to Buy scheme, buyers are required to repay an equity loan of up to 20% of the property’s value after five years. While the Help to Buy equity loan is interest-free for the first five years, interest will be charged from year six onwards. This additional expense, coupled with the repayment of the equity loan, could put a strain on homeowners’ finances in the long run. Buyers should carefully consider the affordability of these future payments before committing to the scheme. To help understand what to do next, read more about the redemption process and options, which refers to paying back the equity loan.
So do the pros outweigh the cons with the Help to Buy scheme?
The Help to Buy scheme offered a range of benefits for first-time homebuyers, such as lower deposit requirements, government-backed equity loans, and mortgage guarantees. These advantages can make homeownership more accessible and affordable for many prospective buyers and may be useful in alternative government initiatives to get more people on the property ladder. However, the scheme also had its share of drawbacks, including limited property choices, price cap restrictions, and potential long-term financial implications.
If you opt for the scheme, you’ll need an independent valuation at the end of five years when you start paying back the loan. You can read all about this in our Help to Buy valuations guide.
