The government's new Help-to-Buy scheme could lead to large repayments

Help-to-Buy, the new government scheme to help people on to the property ladder, launches on April 1. But homebuyers thinking of using the scheme should think carefully about how and when they're going to pay back the loan that can lead to negative equity and unwelcome interest rates after five years.
Homebuyers using the new Help-to-Buy scheme, the first stage of which launches on April 1, should first think hard about how and when they will repay their government loan.

First-time buyers and existing owners qualify for loans of up to 20 per cent if they buy a new-build home priced under £600,000. While this will help thousands to overcome the big deposit hurdle, buyers should not think they are going to make a quick profit on a resale and should consider the risk of negative equity should property values fall.

Why? Because the loan ceases to be interest-free after five years. From year six, interest of 1.75 per cent applies, rising annually by RPI-inflation plus one per cent.

And it’s a loan that needs to be paid back within 25 years or when you sell. The loan is not a permanent fixed sum but an equity loan based on the value of the property. So if the property has increased in value, the amount to be paid back to the Government will be proportionately higher. In other words, the Government shares any profit.

Take someone buying a £300,000 property with a £225,000 mortgage and using five per cent savings and receiving a £60,000 equity loan. If the property sells for £340,000, the equity loan would have increased to £68,000. Under this scenario, after paying off the mortgage and equity loan, the buyer would be left with £47,000, minus estate agency and other fees. A reasonable outcome.

But if house prices are static or they fall, buyers may find themselves trapped in negative equity, with borrowings of at least 100 per cent of the property’s value and a squeezed budget as interest clocks up on the equity loan.

The best option is to pay off the loan during the five-year interest-free period, which may be possible for many career professionals whose salaries are decent or improving. But the smallprint of the deal stipulates that the loan has to be paid off at the same time as the mortgage. So for the vast majority of buyers the loan will have to repaid when the property is sold.

As many as 74,000 buyers will be helped by the £3.5 billion scheme, according to the Treasury. By stimulating more mortgage lending, the scheme is likely to boost property prices, which is a double-edged sword. While higher prices will help buyers build up equity, others may be priced out of the market.

“The Government needs to be careful this doesn’t create another housing bubble,” says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors. Buyers have to apply through participating house builders and HomeBuy agents. Visit homebuy.co.uk.

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