Contractors' Questions: Is Help to Buy for me amid pre-election lull?

Contractor’s Question: Will the housing market pick up after the general election, and why do people put off selling in the run-up to polling?

Also, due to the housing stock that I’m looking at being depleted, an estate agent is badgering me – a limited company contractor - to have a ‘consultation with their mortgage expert’ about Help to Buy. With H2B, says the agent, I can borrow up to 20% of a property's price; interest-free for 5 years and there’s “no payments towards this amount at all.”

But what about after those 5 years? I thought H2B was only on new builds and for first-timers struggling to come up with a deposit. I don’t want to over-borrow and I’ve already got an AIP via a contractor mortgage specialist for a healthy amount. Should I just tell the agent I’m not interested, and wait for the housing stock to improve post-election?

Expert’s Answer: There always tends to be a lull in the housing market in the run-up to the election because homeowners and buyers alike get cold feet about the possibility of a new government rocking the boat.

The reality is that even if Thursday’s vote does result in a new prime minister, it is unlikely to have an immediate effect on the housing market unless they decide to hold an emergency Budget and do something dramatic to affect homeowners.

Most of the ideas being touted by the main political parties are aimed at solving the housing shortage and offering a much needed boost to first-time buyers, none of which would have a short term effect on the housing market. With this in mind, you are likely to see sellers grow in confidence again towards the end of May as everything settles down post-election, so you may want to play the waiting game and see what comes on to the market in the next few months.

Regarding your other query, Help to Buy is a fantastic scheme for some contractors and we have had a number of clients take advantage in order to get on to (and up) the housing ladder. However it is squarely aimed at contractors who are struggling to save a large enough deposit to purchase without the help of the scheme. If you have already secured an Agreement in Principle (AIP) that you are happy with, then it may be unwise to take on a further government loan if you don’t need to. The agent that you have spoken to is right about the five-year interest-free term, but after this period, you will pay interest at 1.75% which will rise annually in line with the Retail Price Index (RPI), plus 1%. There are no monthly repayments on the equity loan but you will need to repay the government when you come to sell the property, or after 25 years if you decide to keep it.

It is also important to note that you will be required to pay back the same percentage of the property’s value, not the same monetary sum. This is significant, because if your house increases in value over the lifetime of the loan and you borrowed 20% of the purchase price, you will need to pay back 20% of the increased value. That means any equity you have in your home when you come to sell will be eroded, and you will only be entitled to the remaining 5% and anything that you have paid off of your mortgage.

This is a worthwhile sacrifice for homeowners who wouldn’t have been able to purchase the property without the government’s help in the first place, but it may be a bitter pill to swallow if you already have an AIP to purchase a property on your own. You can choose to clear your equity loan sooner by making voluntary part repayments or a full repayment at the properties market value at the time. However if you use your existing AIP, then any growth in your property’s value in the future will be yours to keep and you will only have your mortgage to repay.

You are absolutely right that the Help to Buy equity loan is limited to new builds but there is another option under the Help to Buy scheme that is not. The Mortgage Guarantee option allows you to purchase new and existing buildings and does not involve securing a loan from the government. Instead, you pay your 5% deposit and apply for a 95% mortgage with a lender that is on the scheme. The lender then applies to the government for a Mortgage Guarantee which acts like an indemnity policy for the lender and will protect them if you default on the mortgage.

This enables the lender to offer you rates based on a far higher loan to value than your 5% deposit would normally afford you, so your repayments should be more affordable. It doesn’t sound like the agent has offered you this option but, even if they do, it would be wise to exercise caution if you decide to speak to the agent’s ‘mortgage expert.’ He or she is unlikely to understand your contractor status and may try to force you down the accounts and SA302s route. If you are already with a specialist contractor broker, then speak to them about Help to Buy if it is an option you are keen to pursue. They should be up to speed on it --- there are a number of contractor-friendly brokers offering the scheme and this is likely to be far less hassle than using the agent’s broker. Good luck!

The expert was ContractorMoney, an independent financial adviser to contractors.

Friday 1st May 2015
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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