Mortgages, affordability and shared equity loans

In the last Blog we looked at the cost of a house. We all know how hard it is to raise a deposit for a house so this time we're looking at Help-to-Buy and other schemes.

 

Shared equity schemes enable you to take out a loan which you add to your deposit when buying a property. You then take out a mortgage on the remainder of the property price. This means you could own 100% of the property via a deposit, mortgage and a separate loan secured upon the house.

 

To give aspirant home-owners a hand, Help to Buy is the government equity loan scheme in England which allows you to borrow up to 20% of the value of the house as a loan to top up your deposit which must be at least 5%. To qualify you need to buy a new-build home under £600,000. Help to buy – Everything you need to know. In Wales a Homebuy scheme applies and details are at Wales Government site.

 

It is possible to arrange shared equity schemes with developers too but, in some cases, you pay a rent on the part of the home the developer owns and this can be more expensive than a higher loan-to-value rate mortgage assuming you can get one - most lenders provide the best deals when lending 80% or less of the house value. Shop around to find the best deal.

 

At the moment you can use the Help-to-buy ISA to help you save for a new house. From April 2017 young savers aged 18 to 40 can set up a Lifetime ISA Treasury website , either to save a deposit for a first house or to keep until retirement. It is possible to save up to £4000 per year and the Government will add 25%. Upon reaching 60, savers can withdraw the money tax free. Before retirement there will be a 5% charge and savers will lose the Government bonus and any interest on this.

 

For older people who want to release some capital from their houses there are equity schemes called reversion plans and lifetime mortgages.

 

Reversion plans are a type of ‘money release’ plan that involves homeowners selling a stake in their property for cash while living in it rent free - the older you are the larger the portion of the valuation you can 'sell'. Often relatives found loved ones who had taken out reversion plans and had effectively, due to the company owning part of the house, paid tens (sometimes hundreds) of thousands of pounds over the odds for a cash lump sum. Learn more here Home Reversion.

 

The other type of equity release, uses a mortgage where the interest can be paid or can role up into the loan - the lifetime mortgage.  They have been criticised recently due to the way interest compounds up to double your debt every 10 years. As homeowners live for longer than was expected, their interest bills can become far higher than planned or is fair. Also, early repayment charges need rethinking and to be more fair to adapt to a world where many pensioners decide to downsize. Read more about the lifetime mortgage.

 

The FCA keeps a close eye on these plans because they could unfairly impact on the customer and either cost them more in interest or reduce their gains from their home. It is perhaps time that lenders of lifetime and reversion plans set interest charges and equity gains that are capped to be fair to the customer.