Home Press releases Property marketIs the ticking time bomb of Help to Buy about to explode?

Is the ticking time bomb of Help to Buy about to explode?

London lettings and estate agent, Benham and Reeves, has revealed that having made as much as £9,000 per property in house price appreciation, the government is now pocketing thousands of pounds more in interest from Help to Buy homeowners who have reached the end of their five year interest free period.

The original Help to Buy scheme ran from 1st April 2013 to 31st May 2021, offering an equity loan of up to 20% on the purchase price of a new-build home of up to £600,000, climbing to a 40% loan for those buying 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 your purchase.

The research by Benham and Reeves shows that when taking into account both the depreciation of a property over the last five years, coupled with growth in property values, the government has made a tidy sum on each Help to Buy property across almost every region of England.

The East Midlands has proved the most profitable for the government when it comes to their Help to Buy hand outs, with the average Help to Buy home in the area now worth an estimated £300,690 versus £256,089 five years ago. This means that the government’s original share for those utilising the loan to the full 20% has increased from £51,218 to £60,138 – an increase of £8,920.

The government has also benefited to the tune of more than £8,000 in the North West (+£8,432), the South West (+£8,025) and West Midlands (+£8,001).

In fact, their Help to Buy handout has backfired in just one region, London, where their potential 40% share in the average property has fallen by -£1,590.

What’s more, many Help to Buy homeowners have now reached the end of their five year interest free period, just as interest rates have started to spiral.

The good news is that for the first year, the interest charged is fixed at 1.75%. However, this still means that the average Help to Buy homeowner is facing increased costs. In London, the average annual interest and management fee due in the sixth year of a Help to Buy loan and the first year of the non-interest free loan payback period is a notable £3,455 per year, equating to £288 per month on top of the cost of a Help to Buy mortgage.

Even in the North East, where this additional cost is at its lowest, Help to Buy homeowners will still see an additional £751 added to the annual cost of their Help to Buy repayments.

The bad news? Beyond year one the interest owed increases each year by the annual increase in the Retail Price Index inflation plus 1%. A figure that has climbed substantially in recent years, from 3.2% in July 2018 to 9.0% in July 2023.

Director of Benham and Reeves, Marc von Grundherr, commented:

“Many homebuyers scrambled to utilise the Help to Buy scheme with the promise of a five year interest free period acting as the cherry on the cake. However, many have now seen this five year countdown expire and are not only facing the high cost of their monthly mortgage repayments, but the addition of the interest charged as well.

This is a cost that is only going to climb as the years go by and it’s fair to say that the ticking time bomb of Help to Buy could soon explode for many who simply can’t stomach this additional increase in their monthly outgoings.

Unfortunately, the options are limited. You can only pay off the equity loan in half, or full, meaning that this isn’t an option for most.

There are also very limited options when it comes to remortgaging, with many banks refusing to touch Help to Buy homes, while others require 10% equity in addition to the deposit you originally placed.

This only really leaves you with the option to sell your home, although this will again 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 feeling demand rather than supply, are now becoming very apparent.”

Table shows the average new-build house price five years ago and it’s estimated value today when considering depreciation levels and house price growth and the growth in the government’s 20% equity share from Help to Buy at 20%
Location	NB ave price 5 years ago – July 2018	Est value minus 5-7 year depreciation	Est general market house price growth over 5 year period	Est value now – based on adjustments, est depreciation, and general market growth	H2B maximum equity loan %	Gov share – equity loan 5 years ago – July 2018	Gov share – current – July 2023	Difference
East Midlands	£256,089	£230,480	30.5%	£300,690	20%	£51,218	£60,138	£8,920
North West	£215,664	£194,098	32.8%	£257,826	20%	£43,133	£51,565	£8,432
South West	£299,208	£269,287	26.0%	£339,332	20%	£59,842	£67,866	£8,025
West Midlands region	£262,770	£236,493	28.0%	£302,775	20%	£52,554	£60,555	£8,001
Yorkshire and the Humber	£202,389	£182,150	31.3%	£239,161	20%	£40,478	£47,832	£7,354
South East	£378,576	£340,719	20.5%	£410,516	20%	£75,715	£82,103	£6,388
East of England	£362,155	£325,939	20.0%	£391,127	20%	£72,431	£78,225	£5,794
North East	£188,291	£169,462	24.6%	£211,084	20%	£37,658	£42,217	£4,559
London	£495,794	£446,215	10.2%	£491,820	40%	£198,318	£196,728	-£1,590

Table shows the additional costs of interest and management fees on a Help to Buy loan in the first year following the five year interest free period
Location	Gov share – current – July 2023	Interest fee percentage – first year after 5 year interest fee period	Annual interest fee and management fee due in year 6	Est monthly interest fee and management fee due in year 6
London	£196,728	1.75%	£3,455	£287.89
South East	£82,103	1.75%	£1,449	£120.73
East of England	£78,225	1.75%	£1,381	£115.08
South West	£67,866	1.75%	£1,200	£99.97
West Midlands region	£60,555	1.75%	£1,072	£89.31
East Midlands	£60,138	1.75%	£1,064	£88.70
North West	£51,565	1.75%	£914	£76.20
Yorkshire and the Humber	£47,832	1.75%	£849	£70.76
North East	£42,217	1.75%	£751	£62.57

Table shows the additional costs of interest and management fees on a Help to Buy loan in year 7 following the five year interest free period and the one year period at a fixed 1.75%
Location	Gov share – current – July 2023	Interest fee percentage – year 7 (at 1.75% plus annual increase in RPI + 1%)	Est annual interest fee and management fee due in year 7	Est monthly interest fee and management fee due in year7	Difference – monthly interest year 7 vs year 6
London	£196,728	1.93%	£3,809	£317.40	£29.51
South East	£82,103	1.93%	£1,597	£133.05	£12.32
East of England	£78,225	1.93%	£1,522	£126.81	£11.73
South West	£67,866	1.93%	£1,322	£110.15	£10.18
West Midlands region	£60,555	1.93%	£1,181	£98.39	£9.08
East Midlands	£60,138	1.93%	£1,173	£97.72	£9.02
North West	£51,565	1.93%	£1,007	£83.93	£7.73
Yorkshire and the Humber	£47,832	1.93%	£935	£77.93	£7.17
North East	£42,217	1.93%	£827	£68.90	£6.33

Table shows London example for interest changes and costs – to year 7 of equity loan
Location	Gov share – current – July 2023	Interest fee percentage – first year after 5 year interest fee period	Annual interest fee and management fee due in year 6	Est monthly interest fee and management fee due in year 6
London	£196,728	1.75%	£3,455	£287.89

Year	Est interest %	Annual increase in RPI	Annual interest fee and management fee due	Est monthly interest fee and management fee due
1	0%	–	£0	£0
2	0%	–	£0	£0
3	0%	–	£0	£0
4	0%	–	£0	£0
5	0%	–	£0	£0
6	1.75%	–	£3,455	£287.89
7	1.93%	RPI (July 2023) = 9.0%	£3,809	£317.40
Annual difference	0.18%	–	£354	£29.51
After five years you will be required to pay an interest fee of 1.75% of the amount of your Help to Buy shared equity loan at the time you purchased your property, rising each year after that by the increase (if any) in the Retail Prices Index (RPI) plus 1%. The loan itself is repayable after 25 years or on the sale of the property if earlier
From year 6, interest at 1.75% would be charged on the amount of the equity loan
From year 7, interest on the equity loan would be charged at 1.75% plus RPI + 1%

Historic scheme – The Help to Buy: Equity Loan scheme which ran from 1 April 2013 to 31 May 2021
> It offered customers an equity loan of up to 20% of the purchase price of a new build property with a maximum value of £600,000 (In Greater London, the maximum equity loan was increased to 40% in February 2016)
> The scheme was open to anyone purchasing a property, but was targeted at first-time buyers, who made up 82% of all purchases
> New build properties only
> 5 years interest free equity loan
> As a result of providing the equity loan, the Government has an entitlement to a share of the future sale proceeds equal to the percentage
contribution required to assist your purchase
> So if you took an equity loan of 20% to help purchase the property, you would need to
repay 20% of the property’s value in the future when you came to either sell, or repay your equity loan
> After five years you will be required to pay an interest fee of 1.75% of the amount of your Help to Buy shared equity loan at the time you purchased your property, rising each year after that by the increase (if any) in the Retail Prices Index (RPI) plus 1%. The loan itself is repayable after 25 years or on the sale of the property if earlier
Sources: Gov – UK House Price Index, Santander – The Help to Buy Equity Loan Scheme, Gov UK – Help to Buy: equity loan scheme: data to 31 March 2023, Gov UK – Help to Buy (equity loan scheme): data to 30 September 2021, Gov UK – Homebuyers’ guide to the Help to Buy: Equity Loan (2013 to 2021), accessible version

About the Author

Established in 1958, Benham and Reeves is one of London’s oldest, independently owned property lettings and sales agents. With specialism in residential sales, corporate lettings and property management in prime areas of London, the company operates from 21 prominently located branches and 15 international offices.

View all posts by Benham & Reeves