Thousands of buyers who used the Help to Buy scheme in 2021 are approaching the end of their initial interest-free period and face a double payment hit, as experts question whether Prime Minister Andy Burnham's new plans will offer enough support to first-time buyers.
Two payment rises landing together
Research by Heron Financial shows more than a third (36.5%) of the Help to Buy purchases it arranged in 2021 have their initial mortgage deal ending in 2026 or 2027. That is around the same time the equity loan starts charging interest, which begins in year six.
That means two payment rises landing together: a new mortgage rate, almost certainly higher than the one locked into in 2021, and a fee of 1.75% of the original loan, which rises every year after that. On a £60,000 equity loan, that is about £1,050 in the first year. Three in four (76%) of those 2021 Help to Buy purchases were flats.
New Andy Burnham plans
Around eight in 10 (81%) of Heron's Help to Buy clients who have needed a new deal in the last two years stayed with their existing lender on a product transfer. It comes as Prime Minister Andy Burnham proposed a new first-time buyer initiative called “Your First Home”, intended to help people who can afford mortgage repayments but struggle to save enough for a deposit.
Matt Coulson, founder at Rickmansworth-based Heron Financial, said: "Year six is when the cost Help to Buy deferred finally turns up. The scheme worked because it solved the deposit and the monthly payment at the same time, and the payment part was always borrowed against the future.
"For 2021 buyers, that future has arrived: a mortgage rate that's likely to be higher and an equity loan fee, landing within months of each other. Flats have an extra sting. If the flat is worth less, the amount owed on the equity loan falls with it, but the fee is still charged on the original loan.
"The clients we see coping best planned for year six early, and a surprising number have cleared part of the loan with savings or family money. Your First Home should show buyers, before they sign, exactly what they'll pay once the interest-free period ends, and make remortgaging or paying off the loan simple. Around eight in 10 of our Help to Buy clients stayed with their existing lender, and in my experience the extra paperwork of moving is a big part of why."
Buyers need to know payments
One financial expert said any new scheme should ensure buyers understand exactly what their repayments could look like once the interest-free period ends – before they commit to a purchase. Experts believe Your First Home needs clear future-cost illustrations, affordability checks covering both payments and realistic repayment routes.
Tracey Dixon, buy-to-let mortgage specialist and owner at Cardiff-based Pure Mortgage and Protection, added: "Getting someone the keys is only a success if they can afford to keep them. Help to Buy's year-six squeeze is a warning. A higher mortgage payment alongside equity-loan interest can stretch budgets, especially for flat owners facing rising service charges.
"On a £60,000 equity loan, initial interest adds £87.50 a month without reducing the debt. Borrowers should review their options six months before their deal ends, comparing a product transfer, remortgage and equity-loan repayment where affordable.
"Staying with the lender may help, but leaves the equity loan outstanding. Stagnant property values can limit refinancing options.
"An exit plan should never depend on rising house prices or a substantial pay rise. Your First Home needs clear future-cost illustrations, affordability checks covering both payments and realistic repayment routes. Otherwise, it risks postponing the affordability problem rather than solving it."
Look at overall situation
Borrowers up for renewal are being urged to look at their overall financial situation, consider the repayment of the equity loan, and budget for potentially a few extra costs if remortgaging.
Justin Moy, managing director of Chelmsford-based EHF Mortgages, added: "Interest rate shock is hitting just about every borrower who took a five-year deal back in 2021/22, irrespective of whether they bought through Help to Buy (HTB), but there will be many who have stuck their head in the sand and not adjusted their budgets for higher rates. The HTB loan is priced significantly lower than an equivalent mortgage cost for the same loan, so in the short term, while it's a new monthly cost, it's still significantly cheaper than the alternative.
"Most borrowers stick with their current lender just to avoid the additional process of postponing the HTB charge on a remortgage, which incurs additional costs in the process as well as extra time, so the uptake of PTs over remortgaging isn't a huge surprise. Borrowers coming up to their renewal need to look at their overall financial situation, consider the repayment of the equity loan, and budget for potentially a few extra costs if remortgaging."
