What buyers need to know about costs of Help to Buy as number of loans hits new record

The number of homes bought using the Help to Buy loan scheme has hit a new record, but what do rising house prices mean for the cost of these loans?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

a young couple celebrate getting the keys to their new home by taking a selfie in the garden

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House prices have risen significantly over the past year. However, shrewd buyers can still get on the property ladder by taking advantage of government schemes. The Help to Buy: Equity Loan Scheme is one option that a large number of buyers have been taking advantage of during the current period of soaring house prices.

According to recent data, the 12 months ending in June 2021 saw the highest number of Help to Buy loans on record. However, rising house prices mean that those who take out these loans face higher repayments down the line. Here’s exactly what buyers need to know about the cost of Help to Buy loans.

[top_pitch]

How does the Help to Buy loan scheme work?

The scheme sees the government lend buyers up to 20% of the cost of a new home (40% if you are buying in London). So, with the loan, you only need to come up with a 5% deposit. You then take out a mortgage for the rest.

For the first five years, the loan is interest free. You will pay 1.75% interest in the sixth year and after that, interest rates will rise based on the Consumer Price Index (CPI) plus 2%.

The scheme is currently only available to first-time buyers and it can also only be used for new build homes.

What has happened with Help to Buy loans in the last year?

Recent data published by the government shows that a record 60,634 homes were bought using Help to Buy loans in the year to the end of June 2021. That is 43% higher than the figures for the year to June 2020 (42,318) and a new record.

Of the properties bought under the scheme in the year to June 2021, 51,544 were purchased by first-time buyers. This is 49% higher than in the year to June 2020.

The total number of homes bought using the Help to Buy scheme since it was launched in 2013 is 339,347, with 280,495 of these belonging to first-time buyers.

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What do buyers need to know about the cost of Help to Buy?

According to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, “Anyone considering the Help to Buy equity loan scheme needs to be aware that rising prices could also make their loan eye-wateringly expensive further down the line.

The reason is that when it comes to repaying the Help to Buy loan, the amount you repay depends on the value of your property rather than the amount borrowed. As home prices rise, so does the amount you must repay. If you borrowed 20% of the purchase price, you will repay 20% of the home’s value at the time of repayment. 

Say, for example, that you took out a 20% loan to buy the average house in June 2015 and repaid it in June 2020. You would have to repay £7,581 more than you borrowed. Meanwhile, due to the rising market of the last year, someone repaying the loan a year later in 2021 would have to repay £10,557 more than they originally borrowed. So, last year’s rising market would have cost a buyer £3,000.

In a nutshell, it’s important to consider what a Help to Buy loan might cost you in the future before you borrow.

And once you get the loan, it also makes sense to pay it off as soon as you have the means to, especially as it’s likely the value of the property will rise in the future. This will help you avoid paying back significantly more than you borrowed. It will also allow you to fully benefit from any increase in the value of your property.

What other options are available for first-time buyers?

If you are currently working hard to build a deposit, there are other options outside of Help to Buy.

For example, if you are aged 1839 and plan to buy your first property a year or more down the line, consider saving some of your deposit in a Lifetime ISA (LISA).

You can put up to £4,000 a year in a LISA and the government will give you a bonus of 25%. That’s up to £1,000 of free money from the government to use towards the purchase of a property.

For buyers with longer time frames, another good option is a stocks and shares ISA, which allows you to invest in the shares of top companies. Though investing in stocks is riskier, it has the potential to deliver higher returns than those of standard savings accounts, especially over the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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