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How should I fund my help-to-buy home purchase?

The Guardian logo The Guardian 16/03/2019 Virginia Wallis
a sign in front of a brick building: The help-to-buy scheme can provide funds for buying a new home – but it does have its downsides. © Getty Images The help-to-buy scheme can provide funds for buying a new home – but it does have its downsides.

Q I am currently in a process of securing a mortgage and help-to-buy equity loan on a new build with a purchase price of £420,000. My mortgage adviser has proposed that, to fund the purchase, I put down a cash deposit of £40,000 with a mortgage of £212,000 and apply for a help-to-buy equity loan of £168,000.

When I enquired about securing a mortgage before I went down the help-to-buy route, I was told I could get a loan of up to £366,000. So I am a bit puzzled as to why my current mortgage adviser is suggesting that I go for a mortgage of only £212,000. With a bigger mortgage, I could go for a smaller equity loan which would be smaller and easier to pay off after the five-year interest-free period comes to an end. Or am I wrong in thinking that getting the maximum mortgage amount of, say £360,000 plus my £40,000 deposit would require an equity loan of only £20,000. I am very confused with this and would like to have the reassurance that my mortgage adviser is actually trying to secure me the best deal possible.

JM

A The figures that your mortgage adviser has put in front of you are the minimum contributions that the help-to-buy rules require. So for help-to-buy purchases in London (which is where you are buying) the minimum combined cash-and-mortgage contribution you must make is 60% of the purchase price which means that you can get a help-to-buy equity loan of 40%. Outside London, in the rest of England, the minimum combined cash-and-mortgage contribution you must make is 80% of the purchase price meaning an equity loan of no more than 20%. Whether you are buying in or outside London, the maximum purchase price is £600,000. But while the rules say that you can’t exceed any of the maximum limits laid down by the help-to-buy scheme, there’s nothing to say that you can’t contribute more than the minimum contributions if you want to. So you are correct in thinking that you could increase the size of mortgage you get to reduce the size of equity loan you applied for to £20,000 which would represent just under 5% of the purchase price. You are also right to think that the lower the equity loan, the less you’ll have to pay back after five years to avoid paying interest on the loan which kicks in after five years. The lower the equity loan, the less of a shock it will be when you realise that you don’t pay back the amount you borrowed when you come to repay the equity loan. Rather – and this is what puts quite a few people off the help-to-buy scheme – you pay back the same percentage of the value of your home that you originally borrowed. So if you had a 40% equity loan, you’ll have to pay back 40% of the value of your home including any increases in value since you bought it.

However, there are other rules which may affect the size of mortgage you can apply for. If you (together with any joint purchaser) require a mortgage which is more than 4.5 times your household income, you can’t use the help-to-buy scheme. So if your household income is £80,000 or less, a £360,000 mortgage would not be an option with help-to-buy. Similarly, if your monthly costs (including mortgage repayments, service charges and help-to-buy admin fees) are more than 45% of your net disposable income) the help-to-buy scheme will not be open to you. It may be that your mortgage adviser has taken these extra rules into account in the proposal you were given but if you would rather keep your equity loan as low as possible, it would be worth asking for revised figures to take into account your wishes. And I can’t help wondering whether – given that you say you can afford a £360,000 mortgage and are able to put down a deposit of £40,000 – you might see if you could manage to buy somewhere without government help.

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