The Scheme offers interest free lending up to a maximum of 20% of the purchase price of a home and applies to new build properties up to a value of £400,000.
Many house builders have signed up to use the Scheme, so if you are currently house hunting and visiting new build development sites it is very likely that the sales team will encourage you to use Help to Buy to maximise your buying potential.
So what is the Scheme and what should you be looking out for? Help to Buy has many strong points and will help the right purchaser in the right set of circumstances. Clearly through the Scheme the Government helps people into housing as well as supporting the construction industry in selling houses but for each individual the question must be asked, is it really the best option for you?
Lets have a look at some of the points you might want to consider;
The business of buying a home can be charged with emotion and some people can become disproportionately attached to chasing a dream. This is particularly the case where you are buying a property which the developer hasn't even started to build and you buy "off plan".
It is very easy to get drawn in and be sold literally a dream house complete with virtual picture perfect lifestyle. But especially if you are a first time buyer consider who is actually giving you genuine independent advice in relation to all your options.
What does the potential buyer proposing to use the Help to Buy Shared Equity Scheme need to remember? In this short note we cannot list all the points you should consider but here are a few to give you an idea of what you need to think about;
Firstly and most importantly in real terms you will end up with two loans and both need to be paid back. Our recent experience tell us that this isn't always being understood by potential purchasers!
Secondly, you also need to remember that the Scottish Government equity share is a percentage of value not a straight loan. As lenders, the Scottish Government, therefore share in the ups and downs of the market and assuming that we will see future price rises, they are entitled to repayment of not only the actual sum which they lent originally ( the initial equity share ) but of an equivalent percentage of the equity share of any price rise.
Thirdly, there are additional duties and obligations applying to any borrower under the scheme, as you are not only signing up to the normal mortgage requirements for instance. maintaining buildings insurance, you also are entering into a legal contract with the Scottish Government which sets out restrictions about what you can and cannot do with your home. These mainly relate to post purchase activities. This means that whilst you own the property and your name is on the title you do not have independent control and that in ways which can be more restrictive than a primary mortgage.
For instance. there are some 11 events that call for repayment. Apart from selling and moving on, some of the events that may arise not infrequently are;
- Re-mortgaging; Most purchasers will look at a fixed rate over a fixed term for their mortgage. So when this runs out depending on the level of the loan and the proposed lender, if you want to or have to re-mortgage, you will need to go back through the Scottish Government's administration agent and obtain approval from the Scottish Government
- Change of names; Circumstances may require you to amend the title to your home by adding or removing someone from the title, for example a spouse or other family member. Again through the administration agent consent would be required from the Scottish Government.
- Relocation; A factor that should not be ignored by many considering the scheme is the likelihood of being temporarily relocated by your current Employer. These days the incidence of migratory working is on the increase. For example you could be working in say Edinburgh but your firm could second you to London for several years with an intended subsequent return to Edinburgh. However, under the Scheme the property must be your only owned residence and cannot be leased. This means the only option may be to sell and that may not be appropriate or reasonable or convenient.
All these events would require the legal documentation to be changed and this has cost and time implications. You will not only be liable for your normal legal, valuation and lender administration fees but also the Scottish Government fees and the administration agency's costs as well.
On the up-side there are protections under the Scheme; for instance ; the house builder has to return to any would-be purchaser who turns out not to be eligible for the scheme, any deposit or reservation fee and unconditionally release them from the contract.
As for valuations, under the scheme valuations will generally be instructed by your lender. Whilst, the Royal Incorporation of Chartered Surveyors (RICS) has a definition of valuation most lenders have sub-definitions that the surveyor will have to adhere to. There can be a significant difference between calculating the market value on a second hand or a new build basis. If it is on a new build basis your 5% deposit may actually be lost straight away as in real terms a percentage of the value may relate to a new build premium.
Under the Scheme, the Market Value is to exclude the existence of the (in effect) Scheme. Whilst this is intended to ensure valuations are not inflated as a result of the Scheme, it is unclear how this is to be achieved, monitored or policed.
If you alter, improve or extend the property future valuations are to exclude these works Remember this relates to differences in valuation and not to the costs of the works.
And think too about costs; It is also important to be realistic about these. Those using the Scheme will undoubtedly face increased upfront and on-going costs. In terms of mortgage costs. there is also some evidence even at this early stage that mortgage rates applicable to the Scheme are higher than purchasers under the Scheme could obtain in the open market.
If you are considering purchasing under the Scottish Government Help to Buy (Scotland) Scheme, it is important that you receive independent legal advice, and have properly researched all your options including other options available to you.
This Scheme is ideal for many particularly if it is used as intended, but there are potential pitfalls and for some they would be better looking outwith the Scheme.
Be aware of marketing hype, keep a level head and be very careful that you don't over stretch yourself financially. I'll leave you to do the maths. Please remember the post purchase responsibilities and budget for the increased upfront and on-going costs.
Help to Buy might be for you however do your home work, shop around for other options and do not rush in without taking legal and other professional advice.