Help to Buy vs 90% Mortgage Purchase
Help to Buy vs 90% Mortgage Purchase
By Chris De Luca, Financial Adviser
Although the Help to Buy government loan has enabled people to get onto the housing ladder sooner, there are many points that are being glossed over. Many people become confused when trying to compare this scheme with a 90% mortgage purchase. In this blog, I share my knowledge to enable you to make a more informed decision about your mortgage.
In my previous articles on housing and planning, I have explored processes that can help you create your own financial plan. I have also mentioned certain areas of significance that will have an impact and confront you when you are about to purchase a house. For most people, this is probably the largest transaction they will ever make (and more than once in a lifetime).
For Help to Buy, as long as the purchaser can find a 5% deposit based on the full price, the government will loan you up to 20% of this figure (40% in London). The remaining 75% (55%) can be obtained through a mortgage. As you can see, this is obviously an attractive deal.
Here are some figures comparing Help to Buy with a 90% Loan To Value (LTV) mortgage:
|2019 values||Help to Buy||90% LTV|
|Average 1st time buyer purchase price||*231,500||*231,500|
|Help to Buy Equity Loan||46,300||N/A|
|Monthly Payment (repayment not interest only)||#719pm||1,043pm|
Above figures are based on a 25-year mortgage term with interest charged at 2% for a 5-year fixed deal Help to Buy and at 3.5% for the 90% Loan To Value 5-year fix. These comparisons used to be based on Help to Buy vs. 95% mortgage deals, but the numbers of such offers have shrunk by 95%!
So, clearly, Help to Buy is the winner but be aware there are some pitfalls. For example, the scheme is only available for ‘new build’ properties, which is why such properties attract a £20,000 premium over like-for-like existing houses. And this is why many pundits argue that greenfield site developers have been the main beneficiaries – see my previous blog, How Changes to Housing Policies Affect Us All.
Below are some further figures to help you look at the 5-year position:
|Help to Buy||90% LTV|
|House value @ 5% p.a. increase*||295,459||295,459|
|Outstanding mortgage balance||144,850||179,849|
|Help to Buy Loan||59,091~||0|
|Equity that you own||91,518||0|
Over this period, you would have paid an extra £11,664 in mortgage payments with the 90% LTV deal, but you would have built up an extra £24,092 in equity.
At this point, either route could obtain the same low mortgage deals, so we will use the same 2% per 5-year rate, but you now have to start paying interest (1.75% p.a.) on the Help to Buy Equity Loan. Remember, after all this is a loan.
In the top example, an extra £67.52 would have to be added to the monthly mortgage payment (see #). The interest rate slightly increases each year until you pay off this debt. The capital that you have to repay is based on the percentage of the purchase price the loan represented and not the original amount, although this is the amount your interest payments are calculated on.Here are three other potential pitfalls you should consider:
- At the end of the 5-year period, you will either go onto the lender’s standard variable rate (typically up to 3% higher), or you would need to look for a new deal with your current lender or elsewhere. For new deals, you may have to incorporate the equity amount, which could lead to a significant increase in your mortgage payments.
- From 1 April 2021, Help to Buy will only be available for first-time buyers.
- Remortgaging for the purpose of home improvements will automatically need permission.
The big plus with Help to Buy is that it gets people on the housing ladder quickly, but there is growing evidence that shows the criteria is tightening. Some lenders are not allowing the ‘bank of mum and dad’ to provide the 5% deposit because they want to see a savings habit.
I have mentioned before in previous articles that many commentators are worried about house prices being over-inflated and are concerned that a correction is long overdue. Rising unemployment and the end of the stamp duty holiday in March 2021 is only likely to exacerbate housing market pressures. There is a real risk that many new purchases could see the borrowers in the territory of negative equity, at least for a while.
A further point to consider is the fact that the government is looking at underwriting 95% mortgage deals for first-time buyers to persuade lenders to bring them back. This will continue to inflate prices at a time when the housing bubble could burst, along with all the implications this would bring.
Everyone – from buyer, seller to mortgage lender – is focused on completing that immediate house purchase transaction. But, from a financial planning perspective, what is rarely addressed is where will you be in 5 years’ time.
Consider the following points:
- Will your income have increased significantly (to buy out the Equity Loan)?
- Will you be able to afford the interest rates, which will be undoubtedly higher in 5 years’ time?
- Will house prices continue to rise? Many lenders fear the bubble may burst, leading to a market crash or correction.
- What about your personal/family goals? Always look at the overall impact to your life when thinking about house purchases.
Housing development issues that need to be considered
There is an increasing minority of people/families who will never be able to afford to buy their own home. We are seeing the pre-Right-To-Buy council estates being replaced with swathes of our cities and towns becoming effectively private landlord estates.
We are not making land anymore, so surely brownfield sites should be the first to be used? Of course, decontamination issues would need to be addressed, but perhaps this is an ideal solution to affordable housing? The infrastructure is already in place and brownfield sites are usually in cities, where the target market of young people want to be anyway.
Such ideas solely depend on developers being sufficiently financially motivated. If there’s not enough affordable housing included within developments, buyers will be forced to stretch themselves financially. Since 2008, we have seen extraordinarily low interest rates and have forgotten how things were before. For example, if the average house mortgage is £150,000, a 1% rise in interest rates will mean borrowers paying an extra £1,500 a year of net income. Put simply, this amounts to a £2,200 gross salary pay cut!
Undoubtedly there is a lot to consider when you buy a new home. Whether you utilise the Help to Buy loan or purchase a 90% LTV mortgage, it is important to seek independent financial advice before you decide on your mortgage approach.