Should we use the London help-to-buy scheme to purchase a home?

Q My little family are looking to buy a house in London after many years of renting and scrupulous saving. The good news is that we have accumulated about £100,000 in savings, but the bad news is that the London property market is unfathomably expensive.

We have a daughter under a year old, and hope to have another child in the next few years, so are looking for a two- to three-bedroom house somewhere that’s near our friends, who are mostly in zone two in south London – from Herne Hill to Brixton to New Cross, Peckham and Brockley.

Unfortunately, a simple two-bedroom terraced house (in, say, Brockley or even Lewisham) is priced at more than £550,000. And despite having a relatively decent income and a large deposit, it’s still unreachable for us.

My wife is a full-time mother and doesn’t have an income. I work full-time and earn £84,000 a year. I wondered if you could offer us advice on whether the government’s help to buy London scheme could work in our favour?

I have been looking at new-build properties and there are some suitable ones, but they are close to £600,000. I’m familiar with the pros and cons of the scheme, and I’m aware that the government would own 40% of the property equity, which needs to be paid back at the end of the five-year term.

My question is whether we are better off going for it and using the benefit of 40% of the property not being owned, and making the most of a lower rate mortgage on the remaining 60% but hammering the repayments.

The approach would be to accept and not touch the government equity stake, but sell at the end of the five-year period, and during that time pay the maximum amount possible off the mortgage. That way, wouldn’t we be better off than if we had somehow got a full mortgage on the full amount?

The alternative is that we rent for another few years to hopefully increase our salaries so we can get a bigger mortgage and a bigger deposit. RS

A It is not the case that you have to repay the help to buy equity loan after five years. But you do have to start paying interest on it on top of the £1 monthly administration fee charged from the start of the loan until it is repaid. In the sixth year you pay 1.75% on the amount of the loan when you took it out, with the 1.75% rising by the retail prices index plus 1% in subsequent years.

So if you were to use the help-to-buy scheme, you wouldn’t need to sell up in five years’ time if you didn’t want to. If you want to buy a new-build house costing £600,000 (the maximum price allowed), using London help to buy – which offers an equity loan of up to 40% of the purchase price – would seem to be your only option as you wouldn’t be able to do it on your own, even though you have a sizeable deposit.

Your earnings also work in your favour as you wouldn’t require a mortgage of more than 4.5 times your household income of £84,000. If you did, the help-to-buy scheme would be closed to you. However, if your monthly mortgage costs (plus service charges and administration fees) came to more than 45% of your net disposable income, you also wouldn’t qualify for help.

The minimum amount of cash you must put towards a help-to-buy purchase is 5% of the property price, but you don’t have to stick to the minimum or take out the maximum 40% equity loan. After allowing for the £20,000 in stamp duty that you would have to pay on a £600,000 property, plus around £2,000 in fees, and keeping some savings back for emergencies, you could, for example, put £60,000 down as a deposit (which would be 10% of the purchase price) and take out a smaller equity loan. How much exactly would depend on the size of mortgage you could get.

And even though the equity loan is interest-free, the fact that the amount you owe is likely to rise in line with house prices means that rather than overpaying the mortgage, it would make more sense to build up enough cash to be able to repay the equity loan as quickly as possible.

However, the minimum you can pay back is 10% of the market value of the property at the time of repayment and there is a administration fee of £200.