Market reforms and making the right investment

Bruce Burkitt, Founder & Managing Director at Property Experts offers us some advice..

What are the benefits of the new Help to Buy scheme, what it means to you as a purchaser and what to know to ensure there are no hidden surprises in the future 

Help to Buy was introduced back in 2013 and has proved very popular, especially with young people. Prior to the scheme, buyers below the age of 30 had increasingly struggled to purchase a property with prices rising faster than they were able to save, especially in and around London. Now however, by only needing a 5% deposit, being able to buy their first house is far more achievable.

The new Help to Buy scheme announced in the Spring Budget will run from April 2021 to March 2023. As with the current scheme, a cash deposit of just 5% is needed for the purchase, whilst the government will lend buyers up to 20% (or 40% in London) of the full purchase price of a newly built home, these loans are interest free for the first five years. Whilst Help to Buy is enabling people to get onto the ladder earlier in their lives than they might have otherwise, the long-term affordability of the mortgage is more questionable, for some, at least. Whilst having monthly outgoings for mortgage repayments, purchasers of a Help to Buy property will also be faced with repaying the government loan, as well as their mortgage, after the interest free period has passed.

The government’s equity loan is no simple thing, either. Especially for a first time buyer with presumably little experience in needing a significant loan. Across the UK, different regions have different price caps for the Help to Buy scheme. In London for example, the purchase price is capped at £600,000, whereas in the North East it’s much less at £186,100. How much you pay for your property will therefore impact how big a mortgage you’ll need and also how big a loan you can get from the government. The value of this government loan, known as an ‘equity loan’, is placed against the property.

Looking at a London property worth £600,000, the buyer would therefore be entitled to £240,000 for the purchase, provided by the government, with a deposit of £30,000, equivalent to 5%. If preferred, buyers can choose to increase the deposit they pay, which reduces the equity loan – a sensible move for someone concerned about long-term cash outgoings. The remaining £330,000 needed for the property is then sourced via a mortgage, which you need to apply for. The good news here is, if also applying for an equity loan, the mortgage deal will be cheaper than normal. Ultimately limiting the impact of increasing interest rates on your debt, which can be hugely valuable.

But how does the equity loan work? It’s important to emphasise that whilst it is interest free for the first five years, if paying the loan back after this period it will be subject to interest. Whilst interest will only be charged on the remaining value of the loan, it can result in thousands of pounds more debt. Starting at 1.75% per annum and increasing every April. Many buyers are unaware that if securing a property using the Help to Buy scheme, when you come to sell your home you must repay the same percentage of the proceeds of sale as the initial equity loan (i.e. if you received an equity loan for 30% of the purchase price of your home, you must repay 30% of the proceeds of the future sale.

In short, Help to Buy can be the perfect option for some, but for others, its short term gain in return for long term pain. The main consideration here needs to be whether you think the property will gain value whilst you own it. For example, if the housing market rose 20% over the next five years (average 4% a year) like it did from 2015-2020, it would have been a good option to use Help to Buy, as the money made from selling will go a long way in reducing or clearing your debt. However, if the market drops, you could be left with negative equity. Make sure you see value growth in any property you choose to buy, as the most important rule of thumb.

What are the ins and outs of the Government’s 5% Guaranteed mortgage and what that means for FTBs

For young people who traditionally struggle to raise the required liquidity to purchase a home with a 10 or even 15% deposit, the 95% mortgage guarantee certainly opens the door for a different route to get on the property ladder. But please note, there is no difference between this scheme and a typical 5% deposit option, so consider what works best for you. The specifics on applying for this scheme are yet to be revealed, but from what we already know, this could well be an expensive option for buyers.

The new scheme offers buyers with a 5% deposit a 95% loan-to-value mortgage to allow them to make the purchase. These types of loans went all but extinct during the pandemic as market confidence tumbled but are now returning following government pressure and financial support. Unlike Help to Buy, this scheme is not limited to first time buyers however the maximum value of a property is restricted £600,000

What can make the 5% deposit guarantee appealing for some is the understanding that most young people’s salaries will increase significantly as they progress through the early stages of their careers, making the monthly mortgage outgoings more affordable. However, the mortgage is subject to interest, meaning the longer it takes you to pay off the debt, the more you’ll have to pay. Because you’ll only be paying a 5% deposit, your mortgage payments are likely to be considerably more expensive per month, than if you’d have paid a higher deposit. The rates for a mortgage with less than 10% deposit tend to be significantly higher.

It is critically important that you consider the long term affordability of your new property, if paying with a 5% deposit. It’s all very well owning your first home, but if you can’t afford to maintain your livelihood because the mortgage repayments leave you scrapping the barrel, it could be worth considering a smaller property and a smaller mortgage.

How to beat the SDLT deadline and what to do if you miss it  

One thing we learnt from the initial Stamp Duty holiday was that people do want to move, especially at the lower end of the market. However, the cost required alongside a deposit is a big financial ask, especially in today’s economic climate and proportionally far more than previous generations faced.

The extended stamp duty holiday, now June 30th, 2021, promises to offer buyers a maximum saving of £15,000. The extension comes as a result of a growing number of people who looked increasingly likely to miss out on the initial March 2021 deadline, with Zoopla reporting that as many as 230,000 deals could have fallen through as a result.

Prior to putting in an offer it will be essential to ensure that your seller is prepared to work to your deadline – a vacant or chain free purchase would be ideal. Securing your chosen purchase at the best price is a must so research how long your desired property has been on the market for, as the longer the time period, the keener and more open to an offer the seller will be.

In order to give yourself the best chance of buying ahead of the deadline, prior to making an offer it’s important that you first sit down with a mortgage advisor in order to assess and calculate your affordability, from a mortgage lender’s perspective and have details of a competent solicitor who is able to work towards your timeframe. All in all, the process from offer stage to completion typically takes around five months.

Whilst every buyer will be striving to beat the SDLT holiday deadline, property purchases can often encounter delays. With this in mind it’s essential to factor in additional funds in-case you miss the extension, otherwise you risk the purchase falling through due to you having insufficient funds.

Concluding thoughts:

The expense of buying and selling a house certainly isn’t as simple as other transactions, so having an in-depth understanding of what you can afford, what’s good value and whether the property will likely increase in value whilst you live there, is essential. Regardless of what scheme you use to purchase your first property, the investment value and value of your debt must be considered in order to set you up for future success and prosperity.

For further information on property investments contact Property Experts on 020 8720 6901 or visit www.propertyexperts.co.uk


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