Help To Buy – what happens if house prices drop?
Help To Buy was launched by the Government in 2013. The idea behind it was to help people buy a new home without having to save a huge deposit, typically 20% or more of the value of the property. It’s only for buyers of newbuild homes, not of existing properties that have already been lived in.
To date the scheme has been open to buyers of new-build properties costing up to £600,000. In most cases buyers only needed to come up with a 5% deposit because the Government topped it up with an extra 20 % equity loan (or in London 40%). So the mortgage may only need to be 75% loan-to-value to cover the full price.
From April 2021 however there will be new regional caps on how much you can borrow and the scheme will only be available to first-time buyers.
Taking out a Help To Buy equity loan means the Government in effect owns a share of your home, typically 20% of its value until you repay the loan. So when you come to repay the loan the Government gets 20% (or whatever the percentage is) of the value even if your home has increased in value. So you pay them back more than you borrowed.
This might sound like money for nothing but there are a number of potential dangers.
The Consumer Group WHICH? are warning that if house prices drop it could spell trouble.
Help to Buy equity loans don’t have to be repaid until you sell your property, OR at the end of your mortgage term (maximum 25 yrs) – whichever is sooner.
For the first five years the equity loan is interest-free. After that interest is charged on the Help to Buy loan and the interest increases each year. So in year 6, a borrower will start to pay annual interest of 1.75 %, then each subsequent year, the rate rises by the Retail Prices Index plus 1%.
This could coincide with banks’ mortgage rates rising after cheaper introductory deals expire and mortgages are switched to dearer standard variable rates.
If house prices have risen in the meantime then you’ve got some equity in the value of the property which could be used to pay off the loan.
If property prices fall, you still only pay back 20% (or whatever % you borrowed) of the lower value. But there are dangers such as negative equity where the value of the house is less than the mortgage, so you can’t sell it and move on.
For more info read Martin Lewis at Money Saving Expert
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