A reader looking to buy a property in London seeks advice on whether or not to go with a higher mortgage
Q My partner and I are looking to buy a property in London using the help-to-buy scheme, which means we can pay a deposit of as little as 5% and get an equity loan of up to 40%, then take out a 55% mortgage. We have a deposit of about 10% saved up and can afford a 70% mortgage. Interest rates are low right now and that doesn’t seem to be changing any time soon, so I am tempted to go with a higher mortgage and deposit, so we can own more of our property. People think I am crazy not to take advantage of the upper limit of the help-to-buy equity loan, but I hate the idea that the amount I could owe someone might keep rising (even though it could fall as well … but hopefully not). Am I being too conservative and naive? Should I take advantage of the equity loan?
A I think you are right to be cautious about taking out the maximum 40% equity loan just because you can. You are also being sensible in wanting to own as much of your property as possible. And you are right that the main drawback of the help-to-buy scheme is that – assuming house prices keep rising – the amount you have to pay back to Homes England (which provides the equity loan) will also keep rising. Conversely, the amount you owe on a mortgage keeps going down because you are only allowed to take out a repayment mortgage – which can now have a term of up to 35 years – under the conditions of the help-to-buy scheme.
Although the equity loan is interest-free for the first five years, if you haven’t managed to pay it off by the start of the sixth year, interest payments on the equity loan will kick in. If you went for the maximum 40% equity loan on a property costing the maximum £600,000 in London, this would mean interest would be due on £240,000. Using estimates given in the help-to-buy guidance of the retail prices index, which determines the interest rate charged, this would mean an extra £350 a month to pay, with none of that going towards reducing the size of the loan. By year 10, you might have to pay £442 on top of your mortgage and the £1-a-month fee you have to pay from the first year.
Another thing to consider is how you would cope if you wanted to move house. At the moment, help to buy is open to both first-time buyers and people moving home, so you can make use of the scheme to afford your next new-build home. From April 2021, however, help to buy will be available only to first-time buyers. So if you have to pay back 40% of the sale price of your home, there may not be enough left over to buy somewhere else without the external financial assistance help to buy provides.