Help to Buy: How the equity loans & ISAs have cost savers thousands – what should you do?

Martin Lewis gives advice on Lifetime and Help to Buy ISAs

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Help to Buy equity loans help first-time buyers in England onto the property ladder as the Government lends them up to 20 percent (up to 40 percent in London) of the purchase price of a new build. Additionally, Help to Buy ISAs allows savers to put money away for a home while the Government adds a 25 percent bonus on top of what the holder has saved, up to a maximum of £3,000.

Today, the Government published its latest Help to Buy figures and these statistics showed it has been a record 12 months for the scheme.

Hargreaves Lansdown (HL) examined the figures and highlighted:

  • In the year to the end of March, there were a record 55,649 homes bought using Help to Buy equity loans – taking it to a total of 328,506 since the scheme was launched in 2013.
  • 15,341 homes were bought using Help to Buy loans between January and March 2021, up 61 percent from the same quarter a year earlier.
  • The price of the average UK property rose over £27,000 in the year to March 2021, and because loan repayments are based on price rises, it hiked the cost of Help to Buy loans.

Sarah Coles, a personal finance analyst at HL, commented: “We’ve been snapping up Help to Buy loans in this year’s home buying frenzy, and the 12 months to the end of March saw the highest number of loans on record.

“But while rising prices make this scheme particularly handy for those struggling to raise a bigger deposit, they also bring extra risks.

Help to Buy equity loans provide an answer to the impossible question of how to buy in a rapidly rising property market.

“Most people who use them have a five percent deposit (54 percent), and the scheme stops them battling to raise a bigger percentage of the property price at a time when the average property rose more than £27,000 in a year.”

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Ms Coles went on to break down the problems that could be on the horizon while highlighting alternative options for savers: “However, while Help to Buy loans offer a solution to those struggling to buy in a rising market, the way they work means the same rising market will have a sting in the tail for anyone who takes advantage.

“When the loan is eventually repaid to the Government, the amount that needs to be paid back depends on the value of the house at that time.

“If you borrow 20 percent of the purchase price, you repay 20 percent of the value after five years, so when prices rise, so do your repayments.

“If you borrowed 20 percent from the Government to buy the average property in May 2015, and then you repaid the loan in May 2020, you’d have to pay back £5,318 more than you borrowed.

“The rising market in the past 12 months means that someone doing the same a year later would have had to repay £8,751 more than they borrowed – so the rising market cost them almost £3,500.

“If you’re working hard to build a deposit, Help to Buy isn’t your only option. If you’re aged 18-39, and you plan to buy your first property a year or more down the line, you could also consider saving at least some of the deposit in a Lifetime ISA.

“You can put £4,000 a year into a LISA and the Government will immediately top it up by 25 percent – so you could get £1,000 a year from the Government to help you onto the property ladder. And through the LISA, this never needs to be paid back.”

Analysis of Help to Buy ISA statistics also showed it is younger savers who are being hit by these costs.

The average age of a first-time buyer in the scheme is 28 compared to an overall first-time buyer average age of 30.

Overall, 410,075 homes were bought using the scheme, and 538,840 bonuses have been paid – with an average bonus value of £1,073.

The average property bought through the scheme is £175,010 compared to an average first-time buyer house price of £214,452 and a national average house price of £256,405.

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