Much hype surrounds the help to buy scheme. It could be argued that it is of far more advantage to the banks than it is to first time buyers.
Indeed, is it really realistic to expect a first time buyer to pay their interest and save diligently alongside this in order to cover the capital payments which can only be paid in minimum 10% chunks? I think even a second or third time buyer could struggle with this.
In this guest article by professional mortgage advisor, Kevin Hever, he examines the drawbacks of this potentially ill-fated scheme.
Help to buy will be fantastic for some people.
A professional adviser needs to weigh up all the evidence before helping a customer buy a property especially with a new third party involved in the process.
So far it seems all the coverage of this scheme’s been good. Are there any negatives to help to buy?
Here are a few pointers to balance the argument.
After 5 years, interest has to be paid on the loan, initially it’s 1.75% increasing by 1% plus RPI each year.
Some people expect a period of big inflation rates in the future. If Big Inflation happens, the interest rate would soon be a lot higher. Also as this is just interest, these repayments won’t reduce what you owe.
Not as simple as it would seem, at the moment it can’t be done monthly it, must be done in chunks of at least 10% of what you owe. This could be thousands of pounds at a time.
Every time a payment is made the house will need to be independently valued and you’ll be picking up the tab for that as well as the administrative costs involved.
It’s a bit of a buy now, pay later type of scheme.
It’s easy to forget you’ll need to make this extra payment. Even though it’s a low interest rate it will come as a shock if plans are not made to take the payment into account right from the start, unless you are planning to sell within 5 years.
If you have a mortgage, you don’t own your property: the lender does but at least you keep 100% of the property’s value.
If you sell, the government will want their 20% or whatever percentage you borrowed back. But they’re a silent partner; you will have to do the upkeep on your property and pay for any improvements.
You’ll need permission to do any substantial improvements to your property. You’ll have to pay 100% of the cost of the improvements and if you get a better market value as a result of your investment you only get 80% of the profits.
If there’s a boom in prices you might struggle to get the equity out of your property, certainly any new loans on the property require permission.
The choice of rates is quite poor at the moment and not all lenders offer rates for this scheme. Also what happens at the end of any deal? Will you be able to move lender to avoid a potentially higher standard variable rate?
Will other lenders offer remortgage products for people who are in help to buy? Will they have huge charges for moving? Lots of questions here and no answers.
Ever paid 100% of the tax due on something you own 80% of? You will with help to buy.
It always works out hunky dory for them. The government backs these mortgages to the tune of 15% plus you have to put down a 5% deposit yourself. Yet at the time of writing the banks are charging a higher interest rate for these loans than an 80-85% Loan. From their point of view this equals higher profits and less risk plus a captive audience they can offer higher priced mortgage products to for the years to come.
These are the main negatives to help to buy; it’s a great opportunity for people but not without its drawbacks.
Your home may be repossessed if you do not keep up repayments on your mortgage
Kevin Hever has helped 100's of people into their new homes and offers a unique money back service guarantee for his mortgage customers. Please see his web site at www.cornerstonefinancial.co.uk for details.
More info on the scheme can be found here.