Help2Buy whats wrong this idea??

checkingjust

Please tell me the flaws with this plan.

A house costs £100,000.00.

You have £20,000.00 deposit happily sitting in the bank, you choose NOT to use it.

You use the help to buy equity loan scheme and effectively the government lends you £20,000.00 (20%).

You figure (wrongly or rightly) that the housing rocket ship will crash or slow down significantly in the coming years.

You have a right to pay back the 20% loan (£20,000) from the government anytime you want.

In 4 years time, during which you pay no interest on the £20,000 (20%) you have borrowed, your house has dropped in value by 20%. .So it is now worth £80,000.00

You decide to pay back the 20% you  borrowed, so according to the scheme if house prices fall, you pay back 20% of the price of the house at the time of payment.

So you borrowed £20,000.00 on which you paid no interest and you paid back only £16,000.00 and protected yourself from a £4K loss. 

What am I missing, if its a choice between help to buy and a conventional mortgage surely its a no brainier?? Happy to hear the flaws, thanks in advance.

fiveacre

Persuading the Help To Buy scheme to allow you to staircase when the value has dropped might be difficult. You might need to sell up to realise your protection.

SeanG79

The obvious flaw is what if prices increase at say 7%/annum (arbitrary number) over the next 4 years and the equity loan is now £26k. Do you think your £20k savings will have earned £6k interest in the next 4 years?

When did property prices last decrease by 20% over a 4-year period in the UK? Without doing any actual research, I would say not often...

Ramouth

Help to buy is only available on new build homes.  The prices are inflated by the availability of HTB.  A quick google search says this is by around 10%.  

So using your example, you are paying £100000 for a £90000 house.  If prices fall by 20% across the board (which would be a rather drastic fall!) the house would sell for £72000 not £80000. And while you would only have to pay back £14400 on your £20000 loan, you would have lost £22400 of your own money.

Buying a non HTB property without the premium would result in a loss of only £20000.

This example doesn’t take interest into account so is somewhat oversimplified but you might want have a look at the figures in a spreadsheet and compare a few houses before proceeding with your plan.

checkingjust

Thanks for the replies, completely accept if prices rise than the government profits on their share. I too think that the scheme is artificially increasing house prices, hence the question. Appreciate there are a lot of assumptions but providing you are staying put for the long term, paying the equity back sooner wouldn't mean having to sell the house as long as you have the funds to do so. I guess the point I am trying to make is if you pay back the equity part when prices drop because you have the means, but are otherwise happy in your property for the long term; surely you could benefit from the fall and subsequent rise if any. Of course if you have to sell the house to pay back the equity than its a massive risk, but otherwise it is surely beneficial?

Swiftly

Help to Buy is hardly ever worth the hassle if you can already afford the deposit.

Remember that you'll have to get an independent RICS Valuation done when you want to repay which costs around £250 (in London at least) and the repayment will be based on this valuation.  Additional legal fees and repayment fees on top too.