Received wisdom suggests you should make the most of a government equity loan while the scheme is still running.
It is interest free for five years after all, which is always going to compare well against borrowing on a mortgage. Maxing out on Help to Buy is therefore widely perceived as a smart way to boost affordability, helping those who could not otherwise get on the ladder to at least reach the bottom rung.
More controversially, it is used to skip a rung on the ladder for those who can already afford to buy, or already have and simply want to trade up.
The scheme is going to be limited to first-time buyers from 2021, but in the meantime it’s still possible to boost your buying up to a maximum £600,000 and get 20% of the cost funded on an interest-free basis for five years. In London, that rises to 40% – a potential interest-free £240,000 equity loan.
Even though many borrowers do take the largest equity loan possible, alongside the smallest deposit, this should not necessarily be the default option.
Here is why:
Forward planning
The Financial Conduct Authority (FCA) noted in February that a stagnant housing market, combined with the new build premium could leave some Help to Buy borrowers exposed, through a reduced number of re-mortgage options and the fact they are more likely to face negative equity if property prices begin to fall.
Statutory regulation prevents a borrower from overstretching in theory, but it is worth remembering that you do not need to borrow the maximum equity loan, and you can put down a deposit greater than five per cent.
Remember too that the interest-free loan is still a loan, to be repaid with interest after five years.
Importantly, the most affordable option for you at the time of purchase is not necessarily going to be the best all-round approach over the long-term. Borrowing 20 per cent of your property price on an interest-free basis is obviously appealing, but five years is not a long time.
Five-year view
Once the interest-free equity loan becomes interest-charging you will need to factor in those repayments on top of your mortgage unless you have the means to repay it.
It is not easy to assess your financial position, let alone account for inflation, house price inflation and mortgage rates.
But how would your budget stack up when considering the following scenarios:
- Your property’s value does not rise over five years, so you still have just five per cent equity. Or their property’s value dips so you own less than five per cent.
- You are unable to extend your borrowing to part-repay or repay your equity loan and have limited re-mortgage options.
- You have no other funds available to use to repay your interest-free loan, so you need to start paying interest, on top of your mortgage repayments.
- Your circumstances have changed – perhaps you need to sell, have seen your income fall or been made redundant.
Of course, taking the smaller interest-free equity loan option will be more expensive initially, but the difference could be minimal, and more importantly affordable.
You could take the Equity loan and set aside the money needed to repay it.
It leaves you with a greater stake in your home five years later, a smaller sum to staircase to full ownership if buying a Shared Ownership property and perhaps a wider choice of mortgage products at lower rates in the future.
A good adviser will help you consider the up and down sides of your options and help you save money.