Sign up for myFT Daily Digest to be the first to know about mortgage news.
Thousands of owners with Purchase assistance the loans will face pressure on their finances as the first fees fall due to the government next month, experts have warned.
As part of its flagship Help to Buy equity loan program, the government was offering borrowers an equity loan of up to 20 percent of the value of a newly built house, or 40 percent in London.
Although the loans are interest-free for five years, borrowers must then start paying a fee of 1.75% of the value of their loan, plus the RPI plus 1% each year.
The Resolution Foundation, a think tank, said the fees were “a ticking time bomb” for families who held Help to Buy loans.
Starting next month, up to 2,000 homebuyers who took out the first loans in early 2013 will start paying the fees, with most simultaneously paying off mortgages from commercial lenders.
Lindsay Judge, senior research and policy analyst at the Resolution Foundation, said fees on purchase assistance loans could be a “double whammy” for borrowers when combined with a rise interest rates.
According to a recent study by Savills, the estate agency, a 1 percentage point increase in interest rates would add more than £ 900 a year to the cost of servicing an average UK mortgage.
“There is a group of people who are at risk, and there will potentially be a significant impact on their standard of living,” Ms. Judge said.
Annual fees faced by the average London Help to Buy borrower by 2023
According to official statistics, nearly 145,000 properties were purchased with Help to Buy loans last September. About 38% of Buyer’s Aid borrowers have an income of less than £ 40,000.
From next month, the average borrower living outside London will owe the government £ 652 over a year, with that figure rising to £ 788 by 2023, according to the Resolution Foundation’s analysis. For those in London, the average fee will be £ 927 for the year starting next month, rising to £ 1,121 by 2023.
The amount of loans taken out by borrowers has steadily increased since 2013, leaving subsequent borrowers with significantly higher bills.
Those who buy homes in London are likely to have the highest loans and fees as they have been able to borrow up to 40% of the value of their newly built homes, instead of 20%, since 2016.
From the second quarter of 2016, the first period in which Londoners could take out a 40% loan, the average Help to Buy loan to buyers in the capital more than doubled to £ 132,000.
These borrowers will not be required to pay fees until 2021, when they will have to pay £ 2,325 during the year, rising to over £ 2,500 by 2023.
The average amount borrowed by a Londoner in 2017 was even higher, at £ 164,000, forcing them to pay fees of over £ 3,000 in 2023.
Christine Whitehead, professor emeritus of housing economics at the London School of Economics, said that while all borrowers have been given the terms of the loan by lenders and financial advisers, changes in personal circumstances or forgetting the share of borrowers could lead to “a shock” for some.
“I think people will probably be surprised, even if they have been made aware of it,” Professor Whitehead said.
The Department of Housing, Communities and Local Government released an evaluation of the program in partnership with Ipsos Mori and the London School of Economics in February 2016 after interviewing lenders, borrowers and developers.
He found that although nearly 60 percent of borrowers said they had a great understanding of the financial commitments involved in taking out the loan, lenders were concerned that borrowers did not fully understand the loan.
The Housing Department said customers were contacted to make sure they were aware of the charges and had a plan in place for making their payments.
Professor Whitehead added that some borrowers – when they sell their homes and pay the government its equity stake – might start to think they’ve paid “a lot”.
A second evaluation of the loan program is underway, but has not yet been published. It is expected later this year.