The Government’s flagship first-time buyer scheme has been, in some ways, a giant success, popular both with buyers and house builders by keeping them in business in a flagging (thank you, Brexit) economy. But if something looks too good to be true, it probably is. And Help-to-Buy comes with a painful sting in the tail.
Here’s how it works: Buyers can use the scheme to purchase a new home worth up to £600,000 with a deposit of just five per cent. The rest is made up of a 20 per cent Government loan (or up to 40 per cent in London) and a mortgage.
This is great for buyers who can’t tap the Bank of Mum and Dad for a deposit, or borrow enough in an increasingly strict mortgage market. Buyers also seem to prefer the idea of being an outright owner (albeit one heavily in hock to the bank and the Government) to the other big first-time buyer scheme, shared ownership, which involves buying a proportion of the property and renting the rest from a housing association.
The trouble with Help-to-Buy is, after five years, interest payments on the loan kick in, starting at 1.75 per cent, and rising annually by one per cent plus the Retail Prices Index (RPI). This year’s RPI, which broadly tracks inflation, is at 2.7 per cent.
According to an example of costs produced by the Government, if you borrowed £40,000, your annual interest repayments would start at £712, or £59 per calendar month. Doesn’t sound too bad. But, if you’d borrowed the London maximum – £240,000 – those costs would increase six-fold to more than £4,200 or £350pcm.
If the property market was rising, buyers who couldn’t afford the extra cost could simply sell their starter flat at a profit, repay their Government loan and mortgage, and walk away with a good deposit for their next step on the property ladder. But since prices started falling in central London in 2014, the rot has now spread across the capital, the commuter belt, and into wide swathes of the rest of the country.
This means buyers could find themselves in the unenviable position of having to sell at a loss – if prices slip just 10 per cent, a £600,000 flat would be worth £540,000 – firmly in negative equity territory. Compounding the problem is the fact that buyers can only Help-to-Buy new properties, which are more expensive than ‘second-hand’ homes but lose their premium value as soon as they’ve been lived in.
Londoners will be at the frontline of any future problems because the amounts of money they borrow will inevitably be higher. Nationwide says the average spend on a Help-to-Buy property is just over £200,000; you could barely buy a parking space in Zone 2 for that. Yet at the moment, London is the place where prices are falling at their fastest.
So before you get seduced by cheap entry costs and shiny new apartments, read the small print and think hard about the long term – how long you will realistically want to stay in the property, what your exit strategy will be, and where you’ll find an extra hundred quid or so a week for interest payments if needs be.
Otherwise you could find yourself at the sharp end of a ticking property time bomb.
Ruth Bloomfield is a journalist and property expert