BUYING a home on the “wrong” day could end up costing first-time buyers £4,760 thanks to a quirk in the Help to Buy scheme.
Research by MoneySavingExpert found that homeowners who completed at the end of the year with an equity loan from the Government will end up forking out more than those who bought at the start.
2 The “calendar lottery” means that some first-time buyers can end up paying back more than othersCredit: Getty Images – Getty
It’s all to do with the interest rates. The Government will lend first-time buyers up to 40 per cent of the property value interest-free for five years.
But at the start of the sixth year, borrowers will be charged 1.75 per cent on the outstanding balance.
This then increases every year inline with the RPI measure of inflation plus 1 per cent.
But a rise in inflation kicks in on April 1 every calendar year which doesn’t necessarily coincide with the anniversary of the day you completed.
2 MSE analysts worked out hypothetically how much the “calendar lottery” could cost youCredit: MoneySavingExpert
This means that the earlier in the year you bought your home, the longer the period you have of paying lower rates.
For example, someone who starts paying 1.75 per cent interest on the loan on February 1 2019 won’t have to pay the rate rise until April 1 the following calendar year.
But homeowners who start paying the basic rate on December 1 2019 will also have to start paying the rate rise on April 1 2022.
That means the one who bought their home in February pays the lower rate for 15 months while those who completed in December only benefit for three months.
So when is the best time to buy a home with a Help To Buy equity loan? If possible, complete on the purchase between January 1 and April 1 so you can stick with the lowest rate for longer.
The worst day to buy is December 31 because you’ll start paying the higher rate within a few months – you’re better off waiting one more day.
MSE analyst Kit Sproson crunched the numbers to show just how unfair the “calendar lottery” can be for first-time buyers.
What help is out there for first-time buyers?GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move.
Help to Buy equity loan – The Government will lend you up to 20 per cent of the home’s value – or 40 per cent in London – after you’ve put down a five per cent deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25 per cent on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25 to 75 per cent of the property but you’re restricted to specific ones.
“First dibs” in London – London Mayor Sadiq Khan is working on a scheme that will restrict sales of all new-build homes in the capital up to £350,000 to UK buyers for three months before any overseas marketing can take place.
Starter Home Initiative – A Government scheme that will see 200,000 new-build homes in England sold to first-time buyers with a 20 per cent discount by 2020. To receive updates on the progress of these homes you can register your interest on the Starter Homes website.
Assuming that interest rates rise by 4 per cent every year (this is a loose assumption) they worked out the extra cost on varying loan sizes based on paying them back over 25 years.
First-time buyers will be charged an extra £4,760 on a £240,000 Help to Buy loan if they bought at the end of the year compared to the start.
It’s an extra £1,638 on an £80,000 loan or £1,229 on a £60,000 loan.
Of course, not everyone has a choice when it comes to choosing a completion date – often you’re subject to availability but it’s worth asking if a developer will hold off.
Admittedly it’s complicated and not very clear in the official Help to Buy guide either, where the issue isn’t mentioned.
Guy Anker, MSE deputy editor, slammed the system “unfair” and that it’s “poorly explained”.
He added: “There will be winners too, so for some it may be worth delaying a December completion till January, but that is reliant on the developer allowing this.
“Even if such a delay is permitted, don’t rush into the decision until you’ve thought through the consequences and got any necessary advice as it won’t be right for everyone.”
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A spokesperson from Homes England, who runs the Help to Buy scheme,told The Sun that by raising rates on a fixed date and not completion anniversaries it means that “customers are not exposed to variations in RPI”.
They said: “We explain how the interest rate works in the Help to Buy: Equity Loan agreement, which solicitors must explain to customers before they proceed with a loan.
“For customers with an average-size Help to Buy: equity loan, the difference this system makes is not of great impact.”
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