First time buyer reveals her secrets: What they don’t tell you about Government’s Help to Buy scheme

Many first time buyers will be able to easily recall the pain and struggles that came with saving for a deposit on their first home.

The average deposit could take 17 years to save in areas like London, the Mirror reports, and even then ‘you’ll need someone to buy with for anything more than a studio flat.’

But the Government’s Help to Buy scheme, which was launched in October 2013 to help thousands buy their first property, offered an opportunity for those who would not have otherwise been able to afford to buy and get a foot on the property ladder.

However, some have warned of the potential consequences and that ‘buyers do need to go into this with their eyes open.’

And many who took out an equity loan as part of the scheme, which is set to end in 2023, could ‘face a financial shock’ when interest kicks in on their debt, Money Saving Expert warns.

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An aerial view of Cheltenham

What is Help to Buy?

With a Help to Buy equity loan, the Government lends you up to 20 per cent of the cost of a new build (or 40 per cent in London), so you only need a 5 per cent cash deposit and a 75 per cent mortgage to make up the rest.

This loan is then interest-free for the first five years – giving you a chance to find your feet after making your purchase.

Kimberley Mills, a first time buyer in London, used the scheme to buy her first home in 2018.

The Walt Disney finance manager says despite saving for years, she had nowhere near enough to invest in a new build – purely because she’d never get the mortgage.

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Kim Mills put aside unspent income every month as she continued to flat share – she was able to put this money towards a deposit

The 29-year-old told Mirror money: “Five years ago I was renting a three-bedroom flat in Southfields with two friends, and paying £570 a month plus bills each month.

“But while this was fun, I reached a breaking point and needed my own space to cook and unwind, so I knew it was time to get serious and start saving.”

Kim already had around £15,000 in savings at the time – but the reality was that was not going to be enough to buy a house.

So she upped her game.

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“I started putting away £500 a month from my savings – plus a little more – based on whatever was leftover from the previous month’s earnings.

“I made sure that I enjoyed life and had fun, but made small switches that helped me to slowly save without really ever having to say no to anything.

“Instead of going out, I’d have cocktail nights, dinner parties and other events at home instead. I wanted to avoid the over inflated prices you often find yourself paying when you go out on the weekend. My friends were very understanding – it also made them think twice about their spending.

“I also cut corners on my spending by taking lunch to work, being flexible on holiday dates (always book when airlines have sales and go during off-peak times), buying a monthly travelcard rather than pay-as-you-go and sharing wishlists for occasions, such as my birthday and Christmas, with friends or family.”

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For the first five years you pay only your monthly mortgage and a service charge

Her £15,000 quickly grew to an extra £6,000 a year – amounting to £45,000 after five years.

But while that was still impressive (a £40,000 deposit and £5,000 for fees), it still wasn’t going to be enough.

“I planned to buy a pre-owned home rather than a new build as I wouldn’t have been able to afford it based on my salary,” she said.

“I spent a lot of time on Rightmove and Zoopla looking at house prices for different areas of Greater London and used various bank’s online mortgage calculators to see what I could borrow.

“But I started noticing a lot of the properties on Rightmove were ‘part of the Help to Buy scheme’. So being curious, I decided to do some digging to find out what it was.”

 

My Help to Buy experience

Once Kim found out about the scheme, she started setting up alerts with agents and property websites to find out what exactly she could get – and where.

The  Help to Buy website  is the best place to start for this as it tells you what developers are operating in your area – and how you can apply.

“I found a new build flat in Leon House, Croydon, that supported it,” she told Mirror Money.

“I went along to the open day and, after falling in love with it, I decided to reserve a flat. The mortgage broker was there to provide a breakdown of my borrowing on the Help to Buy scheme.

“He asked me how big my deposit was –  and while you are only required to put down 5 per cent, I opted to put down 10 per cent. This meant I could reduce my mortgage to only 50 per cent and save on the interest payments.

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House hunters in London are able to borrow an equity loan of up to 40%, interest free for the first five years, with a minimum of 5% deposit

“After reserving my plot in the building I was quickly asked to provide financial statements and an estimate of my monthly spending to allow the mortgage application to begin, which was submitted at the same time as the Help to Buy application.

“I was told a few weeks later that both had been accepted and we could progress with the surveys.”

Kim says she opted to go with the developer’s mortgage broker who then helped complete all of her Help to Buy forms for her – although bear in mind this could cost you (  see our guide on mortgage brokers and free advice, here)  .

“All I needed to provide was the usual data that is requested for a mortgage approval. I really had very minimal input into the process of the Help to Buy application – it made life very easy.”

 

What they don’t tell you when you start up

“My Help to Buy experience was incredibly easy. I barely had to do anything myself,” Kim said.

“It was a very nice surprise and took so much of the stress away.”

However, she says it was not a fast process.

“The property has not been fully built yet, everything is out of your control and you spend a lot of time just waiting for the next step. It sometimes felt like nothing was progressing, when in reality it was – the process itself was quite lengthy.”

“But that says, it’s a very hands-off experience – no stress of filling in lots of forms. And Help to Buy is interest free for five years.”

One of the biggest drawbacks of Help to Buy is that if you choose to sell up, the Government will ask for its 40% stake back.

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Kim’s flat at development stage – she reserved it while it was still being built

But with house prices falling in inner cities, Kim says this isn’t necessary bad.

“Upon selling the property, if it does make a loss then the Government will absorb 40% of the loss made,” she said.

“One of the biggest benefits is the number of companies now offering the scheme. There were plenty of options all over London.”

But she says, bear in mind that after five years you will have to start paying back the interest – and your current salary is taken into consideration for this.

 

The government loan is interest free for the first five years. After that the borrower is charged a fee of 1.75 per cent of the loan’s value. That fee then increases every year at 1 per cent above inflation.

“You also can’t sub-let a buy to let property” she adds.

“This means that everyone living in the building is an owner – minimising any risks of investors renting neighbouring flats to frequently changing tenants. But bear in mind, you will have to pay a ground fee.”

However, while being unable to sub-let means you’ll be able to build a community with local residents, if you choose to move out, the only option you have is to sell up. 

This, she says, means she won’t be able to work abroad or travel in the near future, as she’d not be able to rent the property to pay off her mortgage in the meantime.

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Kim’s flat has its own sky garden

Speaking of the drawbacks, she added: “Any profit made upon selling the flat will be shared with the Government – you’ll keep 60% and pay back 40% of the total amount made from the sale.”

“The Help to Buy scheme has been a very beneficial for first time buyers who otherwise would not be able to get on the housing market. But due to the complex nature of the equity stake from the Government, buyers do need to go into this with their eyes open,” explained Richard Campo, manager at mortgage advisor Rose Capital Partners.

 

“We have seen eye watering ground rent and service charges to the degree where lenders were declining mortgage applications due to the prospect of high future rises and subsequent concerns on affordability on the mortgage.

“Even the introduction of leasehold houses was only stopped by developers when mortgage lenders refused to offer products for these properties.

“The loan offered on Help To Buy is set as a percentage rather than a fixed amount, meaning if a house price doubles the loan would stay fixed, less any capital repayments, while the government would double it’s share (20 per cent outside London, up to 40 per cent in London). As such, serious thought needs to be given on how to exit or refinance down the line.”

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Finding the money to rent a home is proving to be a big challenge for many young people

However, those in favour of the scheme say it gives those completely shut out of the property ladder a lifeline.

“Help to Buy has really opened up the market to a demographic which otherwise would not have been able to afford to buy,” says James Barton, a partner at Knight Frank in the City and east London.

Kevin Roberts, Legal & General Mortgage Club director, adds: “Not only has help to buy given builders the clarity they needed to deliver and plan more homes, but it is consistently supporting those borrowers who need it most.”

 

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