However, while the Help to Buy scheme gives those who could not otherwise afford to buy the opportunity to do so, there are drawbacks, and advisers must ensure their clients have carefully considered these before committing to a loan.
The loan gets more expensive
The interest on the government portion of the loan is quite low when it becomes due: 1.75 per cent. However, after the sixth year, the rate starts to increase. The borrower needs to have budgeted for this, which is what the first swath of Help to Buy borrowers are facing right now.
This sudden introduction of charges can cause problems for those who are unprepared
While the interest-free loan seems very attractive at the time, once the borrower has to start paying it back, interest will increase by 1 per cent plus any increase in the RPI each year. So even if the RPI falls at any time, charges on the government loan will still increase by at least 1 per cent, which on a £40k loan is at least £30 a month more each year. This ever-increasing cost is something potential buyers need to be aware of and prepared for.
It is therefore vitally important that advisers make it clear to their clients looking to use Help to Buy that the loan is not interest-free indefinitely, and make sure they are in position to put money aside to prepare themselves financially for when the loan does need to be paid back.
Uncertain future
Not all lenders will lend on Help to Buy, which means that when a client does come to the end of their deal, their options may well be restricted. This, combined with the rising costs of the government part of the loan, means clients need to be cautious.
Advisers need to ensure their clients are familiar with the lenders who will remortgage a Help to Buy deal, so they can help their clients to remortgage if need be.
You could fall into negative equity
We know that house prices fall as well as rise, but due to the structure of the Help to Buy loan, there is a risk of negative equity.
There is speculation that Help to Buy has inflated house prices, and that those on the scheme have paid more for their new builds than they are actually worth.
This means if house prices fall, there could be Help to Buy borrowers in negative equity. As first-time buyers quite often move after two or three years, this could cause real problems, especially if these borrowers come to the end of theirdeals and find their LTV has actually increased.
