Help to Buy (H2B) is a government initiative set up to help first-time buyers get on the property ladder sooner. If you’re looking to buy your first property, H2B is a great way to make owning a property more accessible.
As an investor this option is unlikely to be available, however it’s worthwhile to be aware of how the scheme works within the UK property market.
The reasoning behind Help to Buy and how it works
The UK currently has a supply and demand imbalance. In short, not enough homes are being built for people to buy.
Chancellor Philip Hammond has called for 300,000 new homes a year, but that’s only half the problem. Property values are currently rising in many areas of the UK, such as Manchester and Birmingham, however salaries are not increasing in line with the rate of inflation. While homes are still regularly appearing on the market, it’s increasingly difficult for first time buyers to make that step on the property ladder without financial support.
In 2013, the government introduced Help to Buy as a mitigating scheme to help with property purchase prices. Anyone looking to buy for the first time, or move, is eligible. However, there are a few stipulations.
If you are considering a H2B scheme, the property must be a new-build home and your total annual income (inclusive of yourself and any others who will contribute to the property) must not exceed £80,000. Your buying power must be under this limit in order to qualify for H2B assistance. The government will then assist you with a contribution towards the property deposit that you’ll then pay off at a later date like a regular loan.
It works on these principles:
- Someone raises 5% of the property price on their own. It’s their stake on the deposit.
- The government lends a further 20%, raising the total to 25% of the asking price. Mortgage interests are reduced because the lump sum is higher than it may be otherwise. As a result, monthly repayments are cheaper.
- The H2B loan carries no interest for five years. Then you’re charged for small repayments.
As an equity loan, Help to Buy is scheduled to end in 2021. The property secured has to be the only home in the applicant’s ownership and you can’t seek H2B support for multiple properties.
Additionally, there’s a H2B ISA, which funnels more money into a savings account for the property with a government top up bonus of £3,000. The ISA cannot be used for a deposit payment; neither can it cover agency or transaction fees. The logic seems to be that the extra cash will help with the opening months’ mortgage interest. You can find further information here.
Is a rental investment eligible for Help to Buy?
Help to Buy was created to aid first time buyers with financial support to get on the property ladder. If the home is acquired for the purpose of renting, H2B is off the table: both for ISAs and the loan equity variant.
If you buy a home for yourself under H2B, you must repay the entire shared ownership loan before letting it out. Regulation is strict around this area of investment. Help to Buy for BTL is considered a loan or ISA given in bad faith. The government can retrieve this amount if they feel the loan is being misused and rent payments are being taken.
MoneySavingExpert.com has some brilliant examples of individuals who have used H2B schemes to purchase their property and have gone on to legally rent these out. Some include moving abroad, living with someone else in a couple of years, or upsizing and renting the first property to supplement income.
What else can assist you if you can’t qualify for Help to Buy?
Help to Buy may be out of the question for a rental portfolio, but that doesn’t mean you have to pay an extortionate sum on your investment. By staying smart and working with an expert, your funds will go further.
Below, we’ve listed several things to consider for your profitability:
- Find the best areas in the UK. Cities tend to be a safer bet for rental investment than towns or the countryside as they experience much more demand. You can sell lifestyle amenities around the property, as well as whatever’s inside of it. But you also have to measure outgoings against the income you’ll get, and the price you’ll eventually sell for. Manchester, for instance, is top of the list in that regard. It has some of the strongest statistics for yields, capital gains and population growth in the nation. Read our analysis of Manchester versus the rest of the UK to see what we’re talking about.
- Use a mortgage broker. They are a fantastic resource and can show you the most favourable rates and term conditions. Jumping into a poor deal will hurt your earnings over time.
- Buy off-plan. This refers to properties that haven’t been completed yet and remain uninhabited. Typically, they exchange for less than their counterparts on the market. In our case, we let investors pay 30% upfront for some spaces, and the remaining 70% as soon as the building work is done. There are many other reasons to buy off-plan – check them out.
Looking for ways to improve your property portfolio this year? Get in touch with an expert at Alliance Investments today.