Increased costs for Help to Buy schemes is a “ticking time bomb ready to explode”, Benham and Reeves director, Marc von Grundherr, has warned.
Analysis from Benham and Reeves warned that interest rates will start to impact Help to Buy.
The estate agent explained that for the Help to Buy scheme, which ran from April 1 2013 until May 31 2021, for the first year the interest charged is fixed at 1.75 per cent.
However, he added the interest owed increases each year by the annual increase in the retail price index inflation plus 1 per cent.
This means for those Help to Buy homeowners approaching their seventh year, the monthly interest paid is set to climb “considerably”.
As an example, the estate agent pointed to those in London who were paying a fixed rate of £3,455 in their sixth year of homeownership and will now see this cost climb to £3,809 as a result of inflation.
This represents a jump of £354.
Grundherr commented: “The ticking time bomb of Help to Buy could soon explode, with those who can’t afford these escalating costs potentially facing the repossession of their homes if they aren’t able to manage.
“This would spell disaster for the housing market and would only pile further pressure on the rental market.”
Buyers' options
Grundherr also warned for those facing the spike in affordability the options are limited.
“You can only pay off the equity loan in half or full, meaning that this option isn’t for most,” he said.
Grundherr also said there are limited options when it comes to remortgaging as many banks refuse to touch Help to Buy homes and others require 10 per cent equity in addition to the originally placed deposit.
He therefore stated that “this only really leaves you with the option to sell your home”.
However, he warned that this could also prove problematic for those who may have fallen into negative equity.
“It’s fair to say that the consequences of yet another poorly devised government housing incentive, focused on feeding demand rather than supply, are now becoming very apparent,” he added.
Government revenue
Additionally, Benham and Reeves revealed that, after making as much as £9,000 per property in house price appreciation, the government is now pocketing thousands of pounds in interest from Help to Buy homeowners who have reached the end of their five year interest free period.
It explained that, when it was running, the Help to Buy scheme offered an equity loan of up to 20 per cent on the purchase price of a new-build home of up to £600,000.
This climbed to a loan of 40 per cent for those buying a property in London.
The five year interest free equity loan meant that the government had an entitlement to a share of the future sale proceeds equal to the contribution required to assist the purchase.
As a result, when taking into account both the depreciation of a property over the past five years, coupled with growth in property values, the government has made a “tidy sum” on each Help to Buy property.
