The Help to Buy calendar lottery – how buying a home on the 'wrong' day can cost you £1,000s
A bizarre quirk of the Help to Buy homebuyers' scheme could end up costing you – or saving you – up to £5,000, depending on which month your purchase falls.
This is all about how interest on the equity loan – that helps buyers get on the property ladder – is charged. Research by MoneySavingExpert.com has found getting it at the 'wrong' time, which is towards the end of a calendar year, means the rate will rise earlier than many expect, which over time could turn into £1,000s extra.
Completing early in a year means you could end up saving large sums, though not everyone has the luxury of being able to set the purchase date. One MSE user who is set to lose out on more than £1,000 describes the quirk as "unjust", while Homes England has admitted its Help to Buy guidance could be clearer. We've broken the issue down to help explain it.
Firstly, what is Help to Buy?
Home hunters with just a 5% deposit can get a loan from the state worth 20% (40% in London) of the price of a new-build property that costs up to £600,000. Say you buy a £200,000 home and have a £10,000 deposit (5%), you can get a £40,000 loan. See our Help to Buy guide for more info on how it works.
The loan must be paid back either when you sell up or at the end of your mortgage term (whichever is sooner), though you can pay it back earlier if you want, which would mean you pay less (or no) interest.
How does the interest work?
You're given the equity loan on the day you complete the property purchase and it is interest-free for the first five years, but interest is payable from year six, starting at 1.75%. It then rises annually in accordance with the RPI measure of inflation plus 1% – and it's when this rise in the rate kicks in that creates the winners and losers, as explained below.
Getting technical, the RPI from the previous September is used, which in 2018 was 1.64%, so the 2019 rise is by 2.64% (making the interest 1.80%) as it's RPI + 1%.
So why will some pay (or save) £1,000s more?
Exactly five years and one day after completing on the purchase of your home, you will start to be charged interest on the loan at 1.75%, assuming you've not yet paid it back.
As we explain above, that interest rises each year with inflation but the rise does not necessarily kick in exactly one year later, ie, it's not six years and one day after the purchase of your home.
You could be forgiven for thinking the rises happen precisely on the anniversary, given some of the official Help to Buy literature says the rate "rises annually from the fifth anniversary [ie, year six] of your equity loan by the increase (if any) in the Retail Price Index plus 1%".
Instead, it happens on 1 April of the following calendar year. So say you began paying interest at 1.75% on 1 February 2019, that rate will rise on 1 April 2020. If you begin paying interest on 1 December 2019, it will also rise on 1 April 2020.
Therefore, borrowers may find themselves on the initial 1.75% for as little as three months or anywhere up to 15 months – and naturally the longer you pay the 1.75% the better, as you spend more time paying a lower rate and less on a higher rate.
So people who complete a purchase on any day between 1 January and 1 April stay on the 1.75% for a year or longer, so are the 'winners'.
Those who buy from 2 April to 31 December get less than a year at 1.75%, so are the 'losers'. Therefore, the 'worst' day to buy is 31 December as you only get three months at the lower rate.
How the 'calendar lottery' creates Help to Buy winners and losers
We've crunched the numbers on varying loan sizes up to the maximum £240,000, assuming the loan is paid back over 25 years – five of which would be interest-free – and assuming the rate rises by 4% each year.
While we don't have a crystal ball to tell you what it'll really rise by, we've used a 4% rise as that's based on a 3% RPI, which is fairly typical over recent years. It may of course end up being cheaper or more expensive. We've used December and January purchase dates as they demonstrate the biggest swings, with December the 'worst' time to buy and January the 'best'.
Of course, if you have the spare cash, paying it off earlier means you pay far less in interest.
Interest if loan issued
on 31 Dec (i)
Interest if loan issued
on 1 Jan (i)
|(i) Assumes interest increases annually by 4%|
Am I really able to influence how much interest I pay?
You can always choose to buy a home when you want, but it depends on availability, and once you've had an offer accepted it depends on the developer by how many days you can move the completion date.
The key here is purchases in December. If you plan to buy a home that month under the Help to Buy scheme, then all other things being equal it can be worth asking the developer to move the completion date to January.
Carefully weigh this up and/or talk to your solicitor or mortgage broker as this can also have negative consequences, eg, if you wait too long you may have nowhere to live.
You may also find yourself at the mercy of building developers' end-of-year accounts. If their year-end is December and they have had a bad year, they may insist on the purchase going through in December to bank themselves more cash. It can work the other way, of course.
'I'll lose £1,000+. It doesn't seem fair'
MoneySaver Michael, 37, borrowed £56,000 via the Help to Buy scheme to purchase a house in Billingshurst, West Sussex in December 2013.
Not long after he started paying interest on his Help to Buy loan at 1.75% in December 2018, Michael was informed he would have to start paying a 1.83% rate from April 2019. Had he bought his home on 1 January, then over 25 years, and assuming a 4% annual rise in the interest rate, he would be paying over £1,000 less.
Michael, who brought the issue to MSE's attention, said: "The extra expense to tens of thousands of people like me is unjust. My issue is that the way the interest appears to be calculated is in complete contravention of what's in the current guide!"
'This calendar lottery is unfair on some homeowners'
MoneySavingExpert.com deputy editor Guy Anker said: "This calendar lottery is unfair on some homeowners who may face £1,000s in extra costs over their mortgage term, while the way interest is charged has also been poorly explained in some of the official literature, meaning many could be unaware their rate will rise earlier than expected.
"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."
Homes England admits guidance 'could be clearer'
The body which runs the Help to Buy scheme, Homes England, has confirmed MSE's findings, but stressed most borrowers tend to repay their loan before or soon after the interest rate becomes applicable.
A Homes England spokesperson said: "We change the interest on 1 April for all customers, based on the previous September (RPI). This affects when customers move up to the next rate of interest and some will benefit from a lower rate for longer, while others move up. However, by using a fixed date for the rate change, instead of loan anniversary dates, customers are not exposed to variations in RPI. These would add complexity and may create a much wider variance in the interest they pay.
"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. But we appreciate that we can do more to explain this in all of our communications, and we are committed to updating all of our guidance.
"While some customers could pay more in interest over a long loan term, our data shows that customers tend to repay their loan before or soon after the interest rate is payable. Already 50% of 2013/14 Help to Buy customers, for example, have redeemed their mortgage."
The Help to Buy scheme is set to end in 2023, while from 2021 it will only be available to first-time buyers.