Warning over Help to Buy scheme as it’s leaving first-time buyers in negative equity
FIRST-TIME buyers looking to purchase new builds using Help to Buy have been warned by the financial regulator that it could leave them in negative equity.
This is when you owe more money on your mortgage than the value of the property, which as well as leaving you out of pocket, can in turn can make it difficult to sell or remortgage.
By the end of 2018, 211,000 first-time buyers had used the Help to Buy scheme to buy their homes, according to a new report by the Financial Conduct Authority (FCA).
Through the government's Help to Buy loan scheme, homebuyers can borrow 20 per cent of the property price on a new-build, or 40 per cent in London, interest-free if they have at least a 5 per cent deposit.
Of those who did so in 2018, 60 per cent paid the minimum deposit of just 5 per cent, compared to 40 per cent of first-time buyers who didn't use the scheme.
The popularity of these low-deposit mortgages combined with potentially falling house prices on new-builds could result in some being unable to sell or get a new loan.
This means homeowners could get stuck on expensive mortgages once their fixed-rate deal expires.
Another issue, is interest on the loan begins to be charged after five years so homeowners often rely on house prices increasing in order to help offset the cost of repaying the cash.
What to do if you’re in negative equity
BELOW are some tips from the Money Advice Service and David Hollingworth of L&C Mortgages on what you can do:
If you’re looking to sell: You may find it difficult to move if you’re in negative equity, but it’s worth speaking to your lender and asking what help it can give you.
How easy it'll be to move will depend on several factors, including how much negative equity you have, the value of your new property and if you're up-to-date with your existing mortgage.
If you're about to remortgage: If your fixed deal is coming to an end, you may also find it harder to remortgage but even then it's worth speaking to your lender.
It may offer you an alternative fix to switch onto rather than having to accept a standard variable rate, which should protect you against future interest rate rises, said Mr Hollingworth.
Get a “negative equity mortgage”: Some lenders, including Nationwide, offer mortgages which let you transfer the negative equity to a new property.
The eligibility criteria can be strict though, and the interest rates are generally higher.
Reduce your negative equity: If possible, you should try and reduce your negative equity by overpaying on your mortgage.
Just make sure to double-check whether your existing mortgage will let you make overpayments and, if so, how much you can overpay without being hit with early repayment charges.
Mr Hollingworth said: "Overpaying as and when you can will accelerate the cutting of the mortgage debt.
"The Help to Buy equity loan can also be bought out in stages but usually in chunks equating to 10 per cent of the property value."
Help to Buy equity loans have to be repaid within 25 years or when you sell the property if that's sooner.
The FCA warned: "A stagnant housing market, combined with the ‘new build premium’, could see a reduced number of re-mortgage options relative to a non-help to buy property.
"They are also more likely to face negative equity if property prices begin to fall."
The warning comes just a week after thousands of homeowners who took out a Help to Buy loan were found to be in arrears due to a string of "administrative errors".
First-time buyers who use a Help to Buy equity loan are also forking out up to almost 22 per cent more for homes than those who bought without one.
David Hollingworth of broker L&C Mortgages told The Sun: "Help to buy doesn’t offer any special immunity from falling prices and there can be a premium for buying a brand new property.
"However, the equity loan is a percentage of the property value, so this would also reduce in a falling market unlike a standard mortgage.
"The equity loan is still a loan, so help to buy users should consider reducing that if they can, particularly as it attracts interest after the first five years."
Stuck in negative equity? Check out the tips in the box above on what you can do.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa - It's a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there's a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan - The Government will lend you up to 20 per cent of the home's value - or 40 per cent in London - after you've put down a five per cent deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa - This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25 per cent on top.
Shared ownership - Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25 to 75 per cent of the property but you're restricted to specific ones.
"First dibs" in London - London Mayor Sadiq Khan is working on a scheme that will restrict sales of all new-build homes in the capital up to £350,000 to UK buyers for three months before any overseas marketing can take place.
Starter Home Initiative - A Government scheme that will see 200,000 new-build homes in England sold to first-time buyers with a 20 per cent discount by 2020. To receive updates on the progress of these homes you can register your interest on the website.
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In August, thousands of first-time homeowners who bought with a 5 per cent deposit two years earlier were thought to be in negative equity.
In June, we also revealed how the Help to Buy scheme has pushed up house prices and helped the rich get on the housing ladder.
Meanwhile, taking the Help to Buy loan out on the wrong day could cost first-time buyers £4,765.