Help to Buy v. 5% mortgage: pros & cons

Generation Rent is a phrase most of us are now familiar with but in October 2020, Boris Johnson decided to cut through the Covid news to announce he wanted to change that to Generation Buy. 

His Conservative party conference speech contained plans to launch a new range of 5% mortgages. While home loans for those with small deposits are not unheard of, they have become a rarity this year as lenders have focused on loaning to those with deposits of 15% or greater.

The news has been well received by the property industry and home movers, who are hoping the mortgages will be introduced while the stamp duty holiday is running, and that they continue beyond 31st March 2021 when stamp duty rates are scheduled to return to normal.

For buyers with small deposits, there is now a choice of purchasing assistance – wait for the 5% mortgage to be introduced or press ahead using the Government’s current Help to Buy scheme. Here we examine the pros and cons of both options:

5% mortgage offers

The Prime Minister’s intention of reinstating mortgages for those with 5% deposits is in its infancy and at the time of writing, details were scant. It is thought the home loans will be long term, fixed-rate in nature and that the Government would provide a state guarantee to encourage lenders to participate, which reduces their risk. It is also thought that the mortgages would be exclusively for first-time buyers and that financial stress tests – which measure a borrower’s ability to repay the mortgage in the present and the future, should circumstances change – could be relaxed or removed completely.

Pros: 

  • easier to get on the housing ladder as a small deposit is needed
  • only the mortgage, and no other loans, to repay 
  • leads to outright home ownership when the mortgage is paid off
  • relatively straightforward to arrange, through a High Street bank, online or via a mortgage broker

Cons:

  • high house prices mean even a 5% deposit can be out of reach for many
  • could be reserved exclusively for first-time buyers
  • the Government own a portion of the property while the loan is outstanding
  • no start date or terms and conditions available at present
  • potential to fall into negative equity quicker than those with a higher value deposit

Help to Buy Equity Loan Scheme

The Help to Buy Equity Loan Scheme was introduced in 2013 and effectively sees the Government loan a buyer up to 20% of the home’s value (40% in London), while the buyer has to personally contribute a deposit of 5%. Together, the two deposits equate to a 25% deposit, allowing the buyer to access more competitive mortgage deals. The current scheme ends in March 2021, although a similar but revised scheme will start in April and run for two years.

Pros:

  • currently applicable to all owner-occupier buyers, including first-time buyers, second steppers and downsizers
  • the Government’s equity loan is interest-free for the first five years
  • the loan itself doesn’t have to be repaid until the property is sold or the mortgage term ends, whichever comes first
  • you can remortgage at a later date and borrow more to clear the equity loan 
  • you can repay the equity loan early and even avoid interest repayments if you do so in the first five years 
  • you are free to sell the property whenever you like

Cons:

  • only valid on purchases of brand new homes bought from house builders or developers
  • interest on the loan needs repaying after five years and the rate will rise annually
  • the new Help to Buy Equity Loan Scheme starting on 1st April 2021 will be restricted to first-time buyers of brand new homes
  • an upper purchase price cap applies – the property should not cost more than £600,000
  • you may end up paying the Government back more than you borrowed, if your home rises in value

If you need help with weighing up your options and crunching the numbers, we’d be delighted to assist. Please get in touch for moving and mortgage advice.