House buying advice

uncle_rufus · 28 Mar 2013 at 11:02

Hey all,

As a forum lurker of many years I've come to know that (sometimes

) GD can be a good source of advice, so here goes:

What do people think about this new govt. scheme? In particular I'm interested in the one which starts next week (5% Deposit, 20% Equity loan interest free for 5 years, then 1.75% + (RPI+1%) per year after, on a new build house). I've been reading around and doing as much research as I can so I think I understand how it works for the most part, but things I'm wondering about:

- How much of a problem would it be if you haven't saved enough to pay off all of the equity loan by the 6th year? The interest rate on that part is better (I think) than the rate on even a 75% mortgage, and would continue to be for some time (probably, always a bit of a gamble of course), so essentially can it just be thought of as a chunk of the mortgage which is costing less until you eventually pay it off?

- Should it be a huge concern that, as an equity loan, the amount owed back to the government would be 20% of the value of the house at the time of repaying the loan (+ interest). Again a bit of a gamble but I think a new build can either go up in value (if it was off-plan for example, or as the rest of the development is finished) or down (due to not being new).

I'm fully aware that this scheme is more aimed at keeping prices high etc. etc. and a bad idea for some. However I feel like we might be fortunate enough to be in just the right position to be able to actually benefit from it. Our rent is very high, and though we are left with enough after all bills etc. to live comfortably it's not easy to save up the sort of amounts needed for a big deposit. My thinking is if getting a 75% LTV mortgage results in monthly payments less than our current rent, and we put the difference into a savings account towards paying off the equity loan, it could be a way of ecaping the "rent trap".

Have I got this completely wrong? I've got a few other questions but I want to see what people think about the above things first...

Thanks in advance

[FnG]magnolia · 28 Mar 2013 at 11:10

As someone who works for a Bank, I'd strongly suggest that you speak to someone in yours.

uncle_rufus · 28 Mar 2013 at 11:30

[FnG]magnolia;24020607 said:
As someone who works for a Bank, I'd strongly suggest that you speak to someone in yours.

Haha! Yes I should probably have mentioned that we have made appointments to speak to our bank, as well as a few different independent financial advisors etc. before rushing into anything. I was just curious if anybody had any opinions on here

Malc · 28 Mar 2013 at 11:53

I'm on the exact same scheme although it was called First Buy when I took it up last March.

It's not a bad scheme. I think you've highlighted the problems with it, but they are just the same problems as buying any new house.

1) They tend to drop in value whilst the house builder is still building, but once that's stopped the house price should increase in line with the rest of the area.
2) They didn't build em like they used to syndrome. Whilst true, new houses are cheaper to run because of this fact. It's all down to what you value in a house.

I'm trying to pay my 20% loan off ASAP whilst my house has dropped slightly in value, this way you get the max gain as it's 20% of the current value of the house. Looking at asking prices in my area, it's probably already increased in value though!

Lastly, the mortgages that you can get will be limited to banks that endorse the scheme. This means the interest rate will probably be slightly higher that what a true 75% LTV mortgage would be.

uncle_rufus · 28 Mar 2013 at 13:22

Interesting... at the expense of being slightly rude do you mind if I ask (roughly) what the figures work out like? I'm mostly interested in how high the mortgage payments would be - When we looked into a straight 95% mortgage the payments were pretty considerable, so I'm hoping even a "slightly poor rate" 75% would be a bit better...

Totally agree about trying to pay off the equity loan quickly if the value falls... Am I right in thinking that you have to pay it all of in one go though right? (I can't imagine how they would work it out otherwise)

Have you had to deal with anything under the housebuilders guarantee? Our other thought was that this could be a bit of a headache (but no worse than having to moan on at a landlord to get something fixed)

uncle_rufus · 31 Mar 2013 at 19:38

Well I thought I'd post back here to update, in case anyone finds this thread via a search or whatever. Having spoken to some financial advisors and developers over the weekend we learnt a few interesting things about the scheme which weren't clear (and contradict what is said above)

Mainly... the 20% equity loan... It's 20% of the value of the property when you first buy it, but it doesn't then track the value of the property. So for example what was said above about "Paying off the equity while the price has fallen slightly" makes no difference whatsoever on this new scheme. The only time the amount you owe changes is if you sell the property - at which point the 20% (or whatever % is left) is recalculated from the value at the time of selling it.

When you hit year 6 you start paying interest on the equity loan as a direct debit each month (starting at 1.75% and rising by RPI*1.01). As for paying off the loan, it has to be paid off in a minimum of 4 chunks of 25%.

Another big surprise is that the offer is only available for a mortgage term of 25 years, no more no less... And speaking of 25 years it also turns out that the equity loan is not as indefinite (apart from if you sell on) as it sounded - but also after 25 years - so if you take that long to pay it off you will suddenly owe the remainder all at once.

As a result of the above we actually found that although using the "Help to buy" scheme did allow us to potentially offer on more expensive new builds than before, when all was said and done the mortgage payments didn't work out any more favourably than the 95% LTV rates on properties just slightly cheaper, so we were a bit confused how this scheme is supposed to be any better.

In the end I think we have decided that perhaps the best option is to stay put and save a bit more... As much as it would be nice to escape from paying rent we don't have a bad quality of life as it stands, so give it a few years and maybe we will be able to afford a decent deposit without the aid of a scheme.

Also dayyyyum, new builds are a minefield... All the "extras" that add up to £10,000s... "Oh it doesn't come with floors... the most cheapest basic floors would cost an extra £3k"... "Oh those heated towel rails in the show-home don't come as standard, they're £300 a piece"... etc etc etc...

TheMeekon · 31 Mar 2013 at 20:04

Thanks for the update on this as I have finally started thinking about buying. I was looking into this scheme last weekly briefly.

Jimbo Mahoney · 31 Mar 2013 at 20:37

uncle_rufus said:
As a result of the above we actually found that although using the "Help to buy" scheme did allow us to potentially offer on more expensive new builds than before, when all was said and done the mortgage payments didn't work out any more favourably than the 95% LTV rates on properties just slightly cheaper, so we were a bit confused how this scheme is supposed to be any better.

Nail -> Head.

The scheme is aimed to prop up both house builders and house prices by "helping" people to pay more than they would otherwise.

Glad you've decided to sit it out a while longer.

Here's my blog update with 2012 Q4 house prices (2013 Q1 soon) and where I think they're going from here.

HangTime · 31 Mar 2013 at 20:54

uncle_rufus said:
As for paying off the loan, it has to be paid off in a minimum of 4 chunks of 25%.

Any further restrictions or can you just pay the 4 chunks at once i.e. "here's £10k... here's another £10k... and another.... and finally the one last job done!"?

Another big surprise is that the offer is only available for a mortgage term of 25 years, no more no less... And speaking of 25 years it also turns out that the equity loan is not as indefinite (apart from if you sell on) as it sounded - but also after 25 years - so if you take that long to pay it off you will suddenly owe the remainder all at once.

Makes sense I guess because they probably need to keep things simple. Worth knowing however as I've always had shorter terms.

Also dayyyyum, new builds are a minefield... All the "extras" that add up to £10,000s... "Oh it doesn't come with floors... the most cheapest basic floors would cost an extra £3k"... "Oh those heated towel rails in the show-home don't come as standard, they're £300 a piece"... etc etc etc...

Yep you need to factor this in, the 'finishing touches' (basically carpets and tiling) we went for were all the on the cheap end and still came to about £2.8k I think. People who don't need to move straight in probably have an advantage as they can do all that after purchase - the problem we had was that they wouldn't allow 3rd party contractors to come and fit carpets etc prior to completion so in the end we bit the bullet and did everything through the developer (with a £2.5k contribution from them). Perhaps could have forced their hand by pulling out on the purchase if they refused but it seemed less hassle to just go with it (things like turfing the garden we left until after moving in of course).

Ev0 · 31 Mar 2013 at 22:09

Always always get them to throw the carpets in when buying a new build, 99.9% of the time they'll do it and means you have them there ready when you move in.

the shadow · 31 Mar 2013 at 22:23

New Build lol
http://www.guardian.co.uk/money/2013/mar/31/buying-new-build-home-shaky

uncle_rufus · 1 Apr 2013 at 00:48

HangTime said:
Any further restrictions or can you just pay the 4 chunks at once i.e. "here's £10k... here's another £10k... and another.... and finally the one last job done!"?

If you mean could you clear the whole loan at once then yes you can... it's just it has to be a minimum of 25% and in 25% chunks... You could pay 50% in one go, or 75% or 100%, and of course it would reduce the amount you pay per month on interest once a chunk has been paid.

Ev0 said:
Always always get them to throw the carpets in when buying a new build, 99.9% of the time they'll do it and means you have them there ready when you move in.

Yeah I think if we had pressed the issue we might have gotten somewhere, but we had decided we weren't going to go ahead until having a think about it anyway (and subsequently decided it may be better to wait).

Well anyway glad you guys found it interesting/useful

fastwunz · 1 Apr 2013 at 10:05

In 2000 my mum and dad in law bought a new build. It's a 4 bed detached house with a really lovely garden and in a beautiful location. It is on a cul de sac with double driveway and with about 25 other similarly sized properties on the road. This, I like.

I don't like squeezed together 'townhouses' which are just basically tiny flats with rubbish gardens and paper for walls between each property. They are also butt ugly and typically in nasty areas.

I completely understand why people buy new build but unless its frankly quite an exclusive development and in a good location you are going to be buggered from the get go.

Lartyconshayo · 1 Apr 2013 at 10:29

def think the LIFT scheme in Scotland better deal. Hope they don't go with this thing as it's UK wide apprently. LIFT was 19 y interest free loan from scottish government up to 40% val of prop . There were of course price thresholds as it was a FTB scheme . But much much better deal than this new initiative. If it doesn't re-open I will have to continue to save. And pay out more than double in rent

uncle_rufus · 1 Apr 2013 at 11:31

fastwunz said:
I completely understand why people buy new build but unless its frankly quite an exclusive development and in a good location you are going to be buggered from the get go.

Based on the places we looked at there was quite a large range between properties. Definitely the 2 and 3 bed places in a lot of cases were pretty cramped - as in the rooms seemed like they must be barely the legal minimum room size. Once you looked at some of the 4 beds (and more expensive 3 beds) the amount of space and just general standard improved massively. Area was pretty nice to be honest, although the plots they had left faced onto what is currently a quiet A-road, but based on the plans for the development if the later phases went ahead that road would become a lot busier we thought.

djferrick said:
LIFT scheme in Scotland...much much better deal than this new initiative. If it doesn't re-open I will have to continue to save. And pay out more than double in rent

Wow... now you see that sounds like a government scheme that actually does have the interest of the FTBs in mind! Nothing wrong with waiting things out though - if nothing else this has made us realise that not using a scheme at all is the best way to go if you can manage it.

HangTime · 1 Apr 2013 at 16:56

uncle_rufus said:
Based on the places we looked at there was quite a large range between properties. Definitely the 2 and 3 bed places in a lot of cases were pretty cramped - as in the rooms seemed like they must be barely the legal minimum room size. Once you looked at some of the 4 beds (and more expensive 3 beds) the amount of space and just general standard improved massively.

I think there is a fair variety too - we have a 3 bed townhouse but I certainly wouldn't describe it as cramped, with the exception of the bathroom perhaps which is more what I would expect from a flat (not too fussed as there two ensuites as well). The 3 bed we originally went to view we found that the second floor bedrooms were too small due to the eaves, but the type we ended up going for was fine. For example in the smallest bedroom (if you exclude the ensuite) we have both a double bed and a single bed and there is still room for furniture.

In hindsight a 4-bed detached might have been a better investment but as a couple with no kids I couldn't really justify the expense especially when the property market was a bit unstable (2008).

As an aside one thing I like doing is when houses of the same type are on the market for sale/rent is having a nose around the photographs online to see what they've done with the interior etc to get some ideas. At the moment our house is very cluttered and lacking in 'wow' factor but it is useful to see what it could look like if we ever came to sell it.