Legal Implications of Help-to-Buy Schemes

Ola Leslie Solicitors

What Was the Help-to-Buy Scheme?

Help-to-Buy was a government scheme designed to assist first-time buyers in England in purchasing their first home. The Help to Buy Equity Loan scheme, to give it its full name, was available only for newly built homes from developers registered with the scheme. There were also regional price limits on the homes that could be purchased under the scheme. The final date for applying for a Help to Buy Equity Loan was 31 October 2022, and the scheme ended in England on 31 March 2023.

A version of the Help to Buy loan scheme remains available in Wales with slightly different rules, but there is currently no equivalent scheme for buying a home in Scotland or Northern Ireland.

How Did the Help-to-Buy Scheme Work?

The Help to Buy Equity Loan scheme in England enabled first-time buyers to purchase a newly built home with only a 5% deposit. The government equity loan covered an additional portion of the home’s value, with buyers funding the remainder through a standard repayment mortgage. The equity loan helped reduce the size of the mortgage required, making it easier to buy without saving a larger deposit.

The size of the equity loan available depended on location. Across England, homebuyers could borrow up to 20% of a home’s value. In London, where property prices are higher, loans of up to 40% were available.

What Were the 2021 Changes to the Help-to-Buy Scheme?

The original Help to Buy Equity Loan scheme was replaced by a new version for 2021–2023, which ended on 31 March 2023.

Unlike the previous scheme, which was available to both first-time buyers and existing homeowners, the 2021–2023 scheme was limited to first-time buyers.

Additionally, while both versions allowed applicants to take an equity loan worth up to 20% of the property value (or 40% in London), the 2021–2023 scheme introduced regional price caps, restricting the maximum value of eligible homes. For instance, in London, buyers could purchase properties worth up to £600,000, whereas in the East Midlands, the maximum was £261,900.

The Advantages of Help-to-Buy

Help-to-Buy provided significant benefits to many first-time buyers. Key advantages included:

Access to Lower Mortgage Rates: A lower loan-to-value (LTV) ratio typically allows access to a broader selection of mortgages and lower interest rates.
Interest-Free for Five Years: The equity loan was interest-free for the first five years, easing the financial burden during the initial years of mortgage repayment.
Low Initial Interest Rate: In the sixth year, the interest rate on the equity loan began at 1.75%, which compared favorably to many personal loan rates. However, this rate increased annually in line with Consumer Price Index inflation plus 2%.

The Disadvantages of Help-to-Buy

Despite its benefits, the Help to Buy Equity Loan scheme had potential drawbacks:

Variable Repayment Amount: Repayments on the equity loan were based on a percentage of your home’s value at the time of repayment, meaning the amount could increase if property values rose.
For example, if a 20% equity loan was taken on a £180,000 home, the loan was worth £36,000. If the property’s value increased to £200,000, the repayment amount would be £40,000 (20% of £200,000).
Rising Interest Rates: After the five-year interest-free period, the loan accrued interest at 1.75%, increasing annually by Consumer Price Index inflation plus 2%. This could lead to rapidly rising costs.
Limited Mortgage Options: Not all lenders offered Help to Buy mortgages, and the terms often differed from equivalent standard mortgage products.
Challenges with Remortgaging: Having an outstanding equity loan could complicate remortgaging. Limited Help to Buy remortgage options were available, often with higher rates and fees.
Restricted to New-Build Homes: The scheme was limited to newly built properties and only those built by developers participating in the scheme.
Permission for Structural Alterations: Major structural changes to a property purchased with a Help to Buy Equity Loan required permission, and an administration fee of £50 was payable. Unauthorized changes could result in the government recalculating the loan amount based on increased property value.
Risk of Negative Equity: New-build properties purchased under the scheme risked falling into negative equity, particularly if property values decreased. Negative equity occurs when the property’s market value falls below the outstanding mortgage and equity loan amounts.
Price Caps: Regional price caps could limit housing options, as eligibility depended on staying within the caps set for the area. This created disparities between neighboring regions with differing limits.

Conclusion

The Help to Buy scheme provided valuable support for many first-time buyers but came with challenges. While it facilitated homeownership by reducing deposit requirements and offering interest-free loans, buyers needed to carefully consider the long-term financial implications, including rising interest rates, potential equity fluctuations, and the limitations imposed by the scheme.

Before proceeding with similar schemes, prospective buyers should evaluate their options and seek professional financial advice to ensure the best choice for their circumstances.