Buying a New Build, Help to Buy & Self Builds
DATE: 28 September, 2021 // Read more from the Blog »
How do I get rid of help to buy?
With great difficulty, pain and suffering. The 2 main ways to do this are to sell or add it to the mortgage. You could pay it cash if you have it but this is uncommon. You can arrange to borrow more money and use that to consume the help to buy loan, you would still need to maintain a minimum equity of typically 10% of the value. Adding the help to buy to your mortgage generally is not considered debt consolidation.
You will need a valuation from an independent surveyor typically around £250, but this will only be valid for 3 months so in an ideal world you should make sure you have enough time to complete everything within that time frame. If you miss the 3-month cut off you will need either to arrange another or have the surveyor update the valuation, a refresh should be much cheaper but not all surveyors will offer one.
You will need a solicitor or conveyancer to do the legal work, whilst you could use a free solicitor provided with a remortgage I would strongly suggest using a proper solicitor/conveyancer as to avoid any unnecessary stress. It will be an additional cost but you may be able to borrow more on the mortgage to cover these costs, or pick a deal that offers cashback.
You will need to deal with target the administrators of the loan too. They usually charge around £200 to start dealing with the redemption.
Should I use help to buy?
People often ask us about the Help To Buy Equity Loan Scheme and whether its good to use. A common frustration we have with it is advisors often don’t tell people the reality of the situation and so they only find out when they come to us for a remortgage.
In laymans’s terms, the government takes a stake in the property of up to 20%. Its free for 5 years except for a £1 per month management fee. After the 5 years they start charging you interest of 1.75% but it increases. People often try to remortgage around the time the interest kicks in.
Because its effectively a stake in the property if the house value goes up, you owe them more when you come to pay it back. So, if you’ve spent a lot of time and money doing the house up, and now its gorgeous and worth £50,000 more. You now owe the government more money, so if you did a 20% help to buy and now its worth £50,000 more you owe the government £10,000 more than you borrowed.
In addition to this quite often the reason people do help to buy is for affordability, often its because they can’t afford the house when they buy it. So, when the interest becomes payable and people want to pay it back, they often can’t afford it and in reality, they were never going to be able to. In this scenario people often end up selling and they’re back to square one.
The ideal scenario is where somebody is going to be on more money at a later date, whether it’s a parent coming off maternity/paternity leave and they will be working or increasing their hours once the kids are in school. Or a professional who will be on a higher pay rate e.g. a teacher, police officer, doctor, accountant. Whilst many roles attract incremental pay rises a minor percentage increase doesn’t usually carry enough impact to make the difference.
You need to consider how you will pay it back when the time comes, you could simply kick the can down the road until you feel you don’t have a choice but as it’s a percentage stake they have on the property, the governments share will grow with the house value.
When you come to repay the help to buy it can be a painful and slow process so you will need to start the ball rolling early, I would suggest allowing 3 months to avoid the stress of it taking too long.
That being said for the right person the help to buy can be a good or mandatory choice, but you need to consider whether it’s appropriate.
As well as meeting the lenders criteria you also need to meet that of the Help to Buy. This includes an affordability assessment that can be stricter than that of the lenders. We have known cases where the banks are more than happy and help to buy has been the complication.
Whilst initially there wasn’t a restriction, it is now for first time buyers only. There is also a price cap that has been applied, the figures for 2021-2023 are below.
HELP TO BUY: REGION MAXIMUM PROPERTY PRICE
North East £186,100
North West £224,400
Yorkshire & the Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
South East £437,600
South West £349,000
Can I get a mortgage to build my own house?
Yes, these are called a self-build mortgage. Not all lenders offer these and there are hardly any high street lenders involved in them. You will need full costings, planning permission and rationale to support the income. Often people want to do the work themselves to keep the cost down, but then comes the question. If you’re working on the house what’s going to happen to your income? If your income stops, how will you afford your mortgage? This is where a lot fall down.
If you manage to get past this hurdle, 9 out of 10 fail. Not necessarily because they didn’t budget correctly at the beginning. But as its your house, you may make changes as you go that a builder perhaps wouldn’t allow if you were buying from a developer. For example, “Why don’t we have actual oak beams instead of artificial?”, “Why don’t we have actual oak doors instead of veneer?”, “Why don’t we have oak flooring instead of laminate?”, “Lets get a hot tub!”. Costs can spiral fast and you can put yourself in a difficult situation. It’s very difficult to get a mortgage on a property that isn’t signed off as complete. Or if you haven’t had the building regulations signed off or if you haven’t organized an acceptable guarantee that a lender will want.
Whilst yes you can do them, and yes, we can help. We just need to make sure you’re ready for anything and have your eyes wide open to the realities and complications you’re likely to face.
Whilst with a traditional mortgage the full mortgage amount is paid on completion, with a self-build mortgage the money is typically released in tranches (lump sums). A lender may allow up to 75% of the value at that point to be released. You only pay for the amount you have drawn down so you don’t pay the full mortgage on day 1. A valuer will need to come out and inspect the property at each stage.
What is the help to buy isa?
Whilst its not possible to open a new one, the help to buy ISA gave the owner a bonus of 25% of the savings amount on completion of a house purchase. The maximum bonus was £3,000 so once you get to £12,000 you may as well start saving in a different account. The solicitor/conveyancer you use will typically charge around £50 per account ISA they redeem.
New Build Mortgages
Whilst they’re the same in the most part, lenders will often apply loan to value restrictions to the applications meaning a bigger deposit may be needed. This is because it’s considered that properties often go down in value once they’ve been purchased for the first time. Flats are particularly problematic as the banks have been badly burned before so want a larger deposit. 5% deposit on a newbuild is uncommon but not impossible, 10% there are a few lenders who can consider but some want 15-20% deposit which can be a problem.
There can be restrictions to the builder incentives too, it differs from lender to lender and help to buy can make the restrictions tighter.