Q I have £15,000 in savings that I have had for a while in an Isa and I’m currently renting a flat for which myself and my partner pay £900 a month. I have been trying to save up for a deposit for a house and can’t seem to raise anymore than the £15,000 I have saved.
I have looked into help-to-buy schemes and they seem like a good option but I’m confused about what happens after the fifth year and also what happens when I sell. For example, if I buy a house for £300,000 with a cash deposit of £15,000, how much will I be repaying in years one to five and how much from year seven onwards. Furthermore how much will I need to give back when I sell the house?
I’m concerned that I’m signing myself up for a scheme that has a catch seven years down the line. LR
A What happens after five years of buying a home with the Help-to Buy-scheme depends on which type of help-to-buy assistance you go for. With your 5% deposit of £15,000 on a house costing £300,000, you can choose between the mortgage guarantee and the equity loan schemes.
With the mortgage guarantee scheme – which is available on both new-build and existing properties – you take out a 95% mortgage and the lender gets a guarantee from the government that it will not lose money if house prices fall and it eventually has to repossess the property.
For your purposes, the mortgage is just like any other. Your monthly payments are determined by the interest rate on offer until the end of the deal you have signed up for. The lenders offering mortgages under the mortgage guarantee scheme are Al Rayan Bank, Bank of Ireland (in Northern Ireland only), Bank of Scotland, Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Post Office Mortgages, Royal Bank of Scotland, Santander, Ulster Bank and Virgin Money.
The equity loan scheme is available only on new-build properties. You get a loan of up to 20% of the value of a property from the government to help you buy your home to go alongside your 5% deposit.
If you haven’t repaid this loan by the time five years are up, from the start of year six, you will be expected to pay a fee of 1.75% of the value of the loan at the time you bought the property but divided by 12 to give the monthly fee due.
So at the start of year six in your case, assuming a purchase price of £300,000 with an equity loan of £60,000, the monthly fee would be £87.50. After year six, the percentage fee rises annually by the retail prices index (RPI) plus 1%. Assuming the RPI was 5% in every subsequent year, it would mean that the monthly fee would rise to £93 in year seven, then to £98.50, then to £104, followed by a fee of £110.50 in year 10.
According to Help to buy: equity loan buyers’ guide – which provides detailed information of how the help-to-buy scheme works – the fee structure is intended to encourage you to repay the government loan before fees kick in. The minimum you can repay is 10% of the market value of your home at the time of the repayment.
When you sell your home, if the loan has not already been repaid, you have to give back the same percentage of the sale proceeds as you still owe. So, for example if you bought your home with an equity loan of 20% but you repaid half of that, you would have to give back 10% of the sale price of your property.
With either help-to-buy scheme, you are not eligible for help under them if the mortgage you want to take out comes to more than 4.5 times your household income. So in your case, assuming a 20% equity loan and a 75% mortgage, you won’t qualify for help to buy if your income (joint if you are buying jointly) is not at least £50,000.
The other thing to bear in mind is that you cannot use an equity loan to pay the stamp duty land tax (SDLT) bill which, on a house of £300,000, would come to £5,000. If you do not have the cash to pay for that, you’ll have to use the cash from your deposit. This in turn would mean that to ensure that you have a deposit of 5% (which you need for both schemes), the purchase price would have to come down to £200,000 on which there would be a SDLT bill of £1,500.
• This article was amended on 8 May 2015 to correct information about repaying the equity loan.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
