My worries with Help To Buy

5 minute read

Jan 13

What is Help To Buy?

In the UK, the Government offers a number of schemes to help people get onto the property ladder. One of the most prominent of these schemes is the Help To Buy Equity Scheme.

Ever since I started reading about this scheme a few years ago, it has filled me with worry for those who have used the scheme.

As a rough introduction to how the scheme works, on certain properties (particularly new-builds) you can use a 5% deposit to purchase a house and can then take out an Equity loan from the Government for up to 20% of the property’s value (or 40% in London).

My concerns arise because financial education is very uncommon in the UK, and so many people see this scheme and think it must be great because it has Government backing.

However, lurking behind the scheme are some quite worrying figures.

The Numbers

Let’s look at an example so that I can demonstrate how this works. If we assumed that you just bought a house for £300,000 outside of London and you had managed to save a deposit of £15,000 (5%). You then managed to get Help To Buy Equity of £60,000 (20%) and a mortgage for the remaining £225,000 (75%).

Amazing, so you are on the property ladder for a total out-of-pocket cost of £15,000. Let’s also realise that to borrow £225k you would have to be on a household salary of approx. £50,000.

Assuming that there are two of you in the household and you both earned £25,000, your take-home pay would be £20,664 each meaning a take-home income of £41,328.

On a £225,000 mortgage you would be making monthly repayments of around £800 (based on 1.7% interest and a 30 year term) meaning your take-home income after mortgage payments is £31,728.

Using the average household spending in the UK for 2021, it costs approximately £2,548 per month to live in the UK which includes housing.

So let’s deduct the average housing cost they have used (£618 /month) and this gives us a monthly figure of £1,930. Over the year this totals £23,160 for the year.

If we deduct this from the take-home income after mortgage payments, this couple would be left with £8,568 assuming they are an average household.

How the Scheme works

With Help To Buy Equity, it is an interest-free loan for the first five years which draws a lot of people in. However, what many don’t consider is whether they will be able to pay this back within five years, because if not they will have to start paying interest on this as well.

Using our example, assuming they are spot-on with the average figures they would have to use every spare penny to pay off the loan and they would have paid off £42,840 of the £60,000 borrowings (except you have to pay back in proportional percentages of the loan - don’t ask!)

So, if they managed to cut back on an extra £3.5k per year then they would be able to pay it off within the first five years, but if not then it’s time to say Hello to even more interest.

After Year Five

Once you reach the sixth year, you pay 1.75% interest on the remaining loan balance. So assuming they had £17,160 left to pay, this would equate to an additional annual cost of £300.30. Not massive, but enough to cause worry.

Had they failed to pay any of the loan off, this would be an annual cost of £1,050 which is a hefty sum for many households to find.

After Year Six

In the seventh year, you then start to see the interest rate increase. It increases by 2% + Annual CPI (inflation) in April (which is estimated to hit 5% in April 2022).

Luckily this doesn’t make the interest rate 8.75% but instead you see 1.75% x 107% = which comes to 1.8725%. This then increases every single year that you do not fully repay your loan, and if inflation rates keep continually rising this could be very painful.

So looking at our average household, let’s assume they managed to pay off an extra £8,268 in Year Six (£8,568 less new interest payments of £300) which leaves them owing £8,892 going into Year Seven.

So in this next year they will have to pay an annual interest cost of £166.50.

They would then be able to pay back £8,402 (£8,568 less interest of £166) meaning in Year Eight they would have £490 left to clear.

The Problem

My issue here is that even the most average household, which this is a prime example of average because:

Average UK Salary in 2021 = £25,971

Average Borrowings per household for HTB = £61,186.10

…that even the most average household with no additional spending above the average for SEVEN whole years manage to pay back their Help To Buy loan only incurring around £500 in interest as a result.

During this time, they wouldn’t be able to save for anything else. No savings for life events; kids savings, bigger one-off holidays, weddings etc. Also no chance to invest and grow their wealth.

Arguably, it would make more sense to invest than to pay off the loan until you get to the point where the interest rate is higher than the returns possible in the stock market, but this isn’t the point I am trying to get across.

I worry that if this is how it would look for an average household who know what they are doing, how would it look for those households with no understanding of finances.

If a household took out a £60,000 equity loan and did not repay it at all, this is what their interest would look like:

Year 1 - Year 5 = £0

Year 6 = £1,050

Year 7 = £1,123.50 (Using 2022 est. inflation)

Year 8 = £1,179.36 (Assuming 3% inflation)

Year 9 = £1,238.33 (Assuming 3% inflation)

Year 10 = £1,300.24 (Assuming 3% inflation)

For households who are not financially savvy, where are they going to find the costs for these interest payments?

That’s what worries me. It is hurting the people it is meant to help!

As always, I am keen to hear your thoughts on this. Let me know by dropping me a message on Instagram.

Sources:

https://www.nimblefins.co.uk/average-uk-household-budget#nogo