Recent figures from the government show that the Help to Buy: Equity Loan scheme has become very popular with homebuyers. According to the data, the number of loans hit an all-time high in the year ending March 2021. But despite the scheme’s popularity, experts warn that rising housing prices pose a potential risk to those who choose to use it.
Here is everything you need to know.
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What’s happening with the Help to Buy scheme?
The Help to Buy: Equity Loan scheme was set up to help buyers who want to get onto the property ladder but cannot save a big enough deposit. Under the scheme, you only have to raise a 5% deposit. The government then lends you up to 20% (or up to 40% in London) of the property’s total value.
Hargreaves Lansdown has looked at the latest Help to Buy figures from the government and highlighted the following:
- In the year ending 31 March, there was a record 55,649 homes bought using the Help to Buy scheme. This takes the total number of homes bought using the scheme since its launch in 2013 to 328,506.
- In the first quarter of 2021 (1 January to 31 March 2021), there were 15,341 properties bought using the scheme. This is up 61% from the same quarter last year.
- The price of the average UK property rose by over £27,000 in the year to March 2021. Since loan repayments are based on price rises, the cost of Help to Buy loans has gone up.
Why are Help to Buy loans risky?
According to Sarah Coles, personal finance analyst at Hargreaves Lansdown, while rising house prices make the Help to Buy scheme handy for those struggling to afford a bigger deposit, they also bring extra risks.
Loan repayments are typically based on the value of the property when you start repaying the loan. If the value of the property goes up, so will the amount you have to repay.
Coles explains: “If you borrow 20% of the purchase price, you repay 20% of the value after five years, so when prices rise, so do your repayments.”
For example, if you borrowed 20% from the government to buy the average property back in May 2015 and then repaid the loan in May 2020, you would have had to pay £5,318 more than you borrowed.
Coles adds that the rising housing market in the last year means someone doing the same a year later would have to repay £8,751 more than they borrowed. In a nutshell, the rising market would cost buyers almost £3,500.
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What other options are there?
Luckily, the Help to Buy scheme is not the only option available if you’re working hard to build a deposit.
According to Coles, “If you’re aged 18-39, and you plan to buy your first property a year or more down the line, you could also consider saving at least some of the deposit in a Lifetime ISA.”
This is a product through which aspiring homeowners can save £4,000 each year and enjoy a 25% free top-up from the government to use towards the purchase of their first home. The good thing is that this amount does not have to be paid back!
Lifetime ISAs are available from a variety of providers, including investing solutions platforms like Nutmeg.
For aspiring homeowners with a longer time frame, it could also be worth looking at investment ISAs. Investing in stocks has the potential to offer high returns for investors in the long run. Keep in mind, however, that the stock market can be volatile. Your investments can fall as well as rise, and you could get back less than you originally invested.
If you’re unsure of the right option for your circumstances, it’s best to seek independent financial advice.
