Help to buy. Can someone explain?

[User1478654]

We have had an AIP for a new build house using Help to Buy Wales Equity Loan. We were going to reserve our plot today but I’ve got a feeling we may be biting off more than we can chew, so any advice would be brilliant, please.

The house is £250,000 - 4 bed detached with two parking spaces.

Our deposit would be £12,500 (We have this)

I believe the equity loan would be £50,000 Interest free for 5 years

Leaving the remaining mortgage as £187,500

My partner earns £56,000 per annum. I currently only earn £8,000 as I am doing most the childcare until our little one starts school. My money doesn’t really help us, towards the mortgage, so we’ll ignore that.

We’ve been pre approved for a mortgage which is £680 per month - this in itself seems very low to me? My partner is the one dealing with the broker and is adamant this is right.

My issue is, if the mortgage did turn out to be £680 per month when/if we get an actual offer through, with bills and council tax we’re looking about £1k a month. Existing outgoings including cars, food, pets, all the essentials are around £1300 per month, it doesn’t leave us with much to play with in my opinion, and it also doesn’t leave us much to be putting aside for this equity loan.

In 5 years, what happens? I can’t quite wrap my head around it. The 1.75% interest and the 1% on top of that, does that get added on monthly to our mortgage increasing it from £680pm? Or just some amassing debt on TOP of our mortgage?

If we re-mortgaged in 5 years, to pay off the equity loan, not using help to buy. Would that shoot the mortgage cost per month up from £680 to something we wouldn’t be able to afford?

If we didn’t remortgage, and just saved up over time to pay the equity loan off we’d have to £500 per month just to pay it off in 10 years. This wouldn’t leave us in a comfortable position on a monthly basis. I don’t want to be poor to live in a big house.

Am I missing a trick here? My partner is so excited about getting our forever home and I’m just petrified of the debt. I got myself in pretty bad debt and have just clawed my way out of it after long gruelling years paying a DMP off. I can’t even go on the mortgage as my credit rating is still destroyed, so it’s all in his name. I’m just scared we’re over committing, but people keep using this scheme and it works out for them? What am I missing?

Bump

I'm not going to crunch numbers however my understanding is that after your 5 year period is up, you are liable to pay the interest on the equity loan each month. As far as I know you can keep this going indefinitely, as you are only liable to repay the loan when you sell the property. You can of course settle the loan earlier too.

The mortgage will have an initial rate and further terms for what will happen after that initial rate, and will also have a set term which might be 25, 30 or even 35 years - the longer the term then the lower the monthly repayments but you end up paying a lot more in the long run.

You could get to repayments of £680pm on a £187,500 loan with an initial loan rate of 2.6% apr - this is likely to be a fixed rate for the first 2 years (but it could be a different number of years). After that initial number of years you will need to rearrange your mortgage which might then be at a higher interest rate depending on what has happened with the economy since then. If you don't get around to rearranging, you will be automatically put onto the bank's SVR (usually much higher). It is possible that interest rates could go up significantly - if they go up by e.g. 1.5% then your repayments could be circa £840 per month instead of £680 per month - but presumably by the time the initial low interest rate runs out, you will be able to return to work and so your household income will be higher by then?

After the 5 years of equity loan period, if you expand the mortgage to pay it off, that will add about an extra £200 per month to the repayments (plus or minus a bit depending on interest rates as above)

On the whole it is all doable so long as there aren't any unforeseen disasters which prevent you from becoming a two-income household within a few years. If you are optimistic about that then go for it.

In the longer term, make sure that as your income increases you start overpaying the mortgage and work towards reducing that loan term - 35 years will mean that you pay an eye-watering amount of interest across the whole period, but just overpaying by £50 or £100 a month can put a massive dent in that.

Great explanation above

There is risk involved, but one way to check for yourself whether it's worth it, is to set the total mortgage costs against the rent you would otherwise pay.

The mortgage will be done in x years, renting would go in forever.

Your husband has a take home pay of well over £3k. And you have £8k tax free per year. And you don’t think you can manage bills of £2300 per month?
The mortgage broker would have done the affordability assessment and thought it Ok otherwise you wouldn’t have an offer.
The prudent thing of course is to save up any spare cash and use it to pay off the equity loan before it starts incurring interest.

Not what you’re asking, but do you really need Help to Buy? You have a high household income, particularly for what sounds (by the price you’re describing) to be a fairly cheap area. With a little more deposit you could buy a £250k house with a mortgage multiple of around 3.5 times your joint salaries, you’d have a wider choice than new builds (which have a price premium in the first place) and you wouldn’t have to repay 20% of any increase in value of your property when you sell it back to the scheme.

Appreciate deposit may be the key factor in opting for H2B though.

@ComtesseDeSpair

Appreciate deposit may be the key factor in opting for H2B though.

Yes deposit is key factor. My partner is 40, so we're pretty late getting on the housing ladder and it's all the deposit we've got. To spend a few years saving up more would mean having to get a shorter term mortgage we may not be able to afford, and we are hoping to have another baby in the next couple of years and we need the space. Help to buy is to just help us buy sooner really.

If you have another baby in the next couple of years, does that mean you are looking at at least another 6 years before your household income can feel the impact of you returning to the work place? That does make the plan look somewhat more risky - your previous posts suggested that you would be back in work sooner rather than later.

The repayments are correct. We pay similar on a mortgage of 170k. At the end of the 5 years you pay the interest only as a separate bill unless you remortgage to pay off the help to buy loan. This would increase your mortgage but don't forget over 5 years you'll have reduced the amount owing..