Introduction

The Help to Buy scheme was introduced by the Conservative Government in April 2013 as a way of assisting first time buyers getting on the property ladder who could also obtain 5% mortgages.

On a purchase, the Government provides a 20% equity loan which was increased to 40% in London due to higher prices, on which 0% interest was paid during the first 5 years, rising to 1.75% in year 6 with each subsequent year increasing by the Consumer Price Index (CPI) plus 2%.

The scheme ended on March 2023

Taking the average Flat and Maisonette price of £420,000 in 2020 the loan repayment would look like this:

Purchase price: £420,000

20% Loan: £84,000

Annual payment in year 6 (1.75%): £1,470

Monthly payment: £122.50

Annual payment in year 7 (assuming CPI @ 3%, so 5% rise): £1,543.50

Monthly payment: £128.60

Repayment when buying loan out

When the property owner comes to sell, or if they wish to buy out the 20% they have to follow a process for repaying the loan to the Government and in both instances they will require a valuation report by an RICS surveyor.

The report will need to determine the ‘market value‘ of the property which is defined as:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.”

Where the owner is buying out the loan, the valuer will have to search for recent sales of similar properties in the area using what is called the comparable method of valuation. Given that the vast majority of help to buy sales are in large purpose built blocks, it is ideal if the sales are from the same block or failing that, very similar blocks close buy.

Repayment when selling

An RICS valuation is also needed when the owner is selling their property as the Government’s loan will need to be paid back in full. Should the property’s value have not changed, then in our example above, the amount to be repaid is the remainder of the £84,000 less the sum of all payments.

If the property’s value has risen, then the value of the loan will also rise. There can also be situations where property values have dropped (flats with no outside space have suffered in a post-covid world), then the owner can find themselves in negative equity, but at least the loan has shrunk.

The valuation process for the valuer still involves the comparable method, but with the very helpful inclusion of the under offer price of the subject property. The valuer will analyse the other sales so make sure the under offer price is not notably too high or too low.

The 3 month validity rule

One annoying requirement is that the RICS valuation has to be no greater than 3 months old, by the time of completion, which given that most sales take around that time, often means that the seller has to commission anther report. Whilst this is an additional cost, the report thankfully can be undertaken without the need for another inspection on a ‘desktop’ basis, and can very often still use the same evidence, just adjusted for price indexes.

At Peter Barry we have undertaken hundreds of Help to Buy valuations. Please contact us either by phone or email and we will be happy to help.