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What is the real cost of Help to Buy?

  1. 18 October 2018
  2. By Nick Perman

People using the government’s Help to Buy Equity Loan are paying more for their new build homes.

By looking at our data across counties and postcodes in the UK, we’ve found that people taking advantage of the Help to Buy Equity Scheme do pay more – by about 8%.

There could, of course, be a variety of reasons for this –that first time buyers using Help to Buy are waiting longer to buy and thus choosing bigger ‘forever homes’, rather than jumping on the ladder with a cheaper ‘starter home’, for example. It's also possible that Help to Buy encourages first time buyers to choose a more expensive property in order to benefit from an equity loan, by making the deposit affordable.

However, more importantly, it seems likely that the prices developers are seeking for properties sold through Help to Buy are higher than equivalent new builds in the same area not using the scheme. 

The government’s Help to Buy Equity Loan allows buyers to get on the property ladder with a 5% deposit. The equity loan plugs the gap between the deposit and the mortgage amount with the government offering up to 20% (or 40% in London) towards a new build property, interest-free for 5 years.

It’s been highlighted over the last year that there have been multiple issues with Help to Buy home owners going to sell and finding themselves in negative equity. There’s also been no shortage of news on how much developers are making in the UK, with a large percentage of that profit coming from Help to Buy properties.

CEO Rob Houghton says:

‘The Help to Buy Scheme has provided a leg up onto the housing ladder for many first time buyers, but this data suggests that first time buyers may not be getting such a good deal after all. When they come to sell they may well find their home simply isn’t worth what they paid for it.’

Beneficiaries of the Help to Buy scheme may face difficulty when selling their property on, as it struggles to compete with new homes nearby offering Help to Buy, impacting its value. At a time when house prices are falling, particularly in London and the south east, first time buyers are at even greater risk of finding themselves in negative equity.

When it comes to repaying the equity loan, buyers can only pay off 50% or 100%, with no option for smaller payments. Interest starts at 1.75% after 5 years and increases every year with inflation, plus 1%.

Those hoping to sell may also find that as they are required to repay the equity loan in full, they are unable to also raise a deposit on their next property, leaving them trapped.

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