Bilal Khan is unable to sell or refinance his property, so he is forced to pay exorbitant interest rates.
A man who is paying £300 per month in interest to the government on a flat he cannot sell, remortgage, or rent out has stated that obtaining a Help to Buy loan was “one of the worst decisions” he has ever made.
In 2018, Bilal Khan, 33, used a Help to Buy loan to purchase a two-bedroom flat in Ealing, west London, for £440,000.
Due to issues with the cladding, he is presently unable to sell the flat and is now unable to pay back his loan, meaning he is caught paying hundreds of pounds in interest each month.
More than 350,000 households took out loans under the Government’s Help to Buy programme, which operated from 2013 until earlier this year and provided loans to first-time homebuyers.
The programme provided tens of thousands of people with a leg up onto the housing ladder, but an increasing number of debtors are now struggling to make payments on their inflation-linked loans.
Help to Buy loans do not accrue interest for the initial five years. Beginning in the sixth year, debtors must pay an interest rate of 1.75 percent. Interest payments will increase annually at a rate equal to the Consumer Price Index (CPI) plus 2%.
“Like most people who take out a Help to Buy loan, I was aware that interest charges would begin accruing after five years, but it was nearly impossible to predict the inflationary environment and its impact on CPI five years ago,” he said.
Mr. Khan is currently paying £300 per month in interest, but next year, when his payments become index-linked to CPI, these payments will increase significantly.
“I try to avoid looking at it because of the anxiety,” he said.
The 33-year-old is stuck making interest payments to the government for the foreseeable future due to the post-Grenfell building safety controversy, which has prevented flat-owners across the country from selling or remortgaging their properties.
Mr. Khan has attempted to repay his Help to Buy loan in full, but has encountered obstacles with Homes England, the government agency responsible for Help to Buy.
Mr Khan’s flat was recently appraised at £320,000, substantially less than the £440,000 he paid for it in 2018.
Mr. Khan believes this is partially attributable to the cladding issues and partially attributable to the “premium” applied to many Help to Buy properties at the time of purchase.
Under Help to Buy regulations, debtors should be able to repay their loan in full, even if the property’s value declines. In addition, the government is expected to sustain a portion of the loss because the amount borrowers must repay is dependent on the property’s new value.
For instance, if someone borrowed 20% of the value of a £350,000 property from the government, and the property’s value fell to £300,000, that person would only be required to repay 20% of £300,000.
However, many individuals seeking to redeem their loans have discovered that the procedure is not straightforward and have complained of lengthy Homes England response times.
Mr. Khan submitted his request to redeem his loan almost three months ago but has yet to receive a response.
“Now I’m in purgatory and my valuation is about to expire, which means I need to pay for a new one, which I’m not really willing to do, and I have no real way to complain or take action. He stated, “I almost feel powerless.”
In addition, Mr. Khan’s five-year fixed-rate mortgage recently expired and he was forced to switch to a tracker mortgage, which increased his monthly payments by approximately £300.
“It was expressly stated in the loan agreement that the risk is shared. If the property’s value rises, the government will benefit, but if it falls, they will assume the risk.
“However, it appears they are unwilling to take the risk if prices fall.” It is a loan that I and numerous others have taken out. Because we’ll be paying the interest, we should have the right to redeem it,” he said.
“It’s probably one of the worst choices I’ve ever made. Now that I have the benefit of hindsight, I can say the following,” he continued.
“I am essentially stranded in a home that is unmortgageable, unsellable, and unrentable. And I now have negative equity due to my current location, the inflated price at the time of purchase, and the cladding. This will cripple me financially in the coming year.
Neal Hudson, a housing market analyst, informed me that many Help to Buy borrowers, such as Mr. Khan, may now be unable to make their inflation-indexed loan installments.
Help to Buy is “certainly one of the risk factors” in the current housing market, according to him.
Those who used the Help to Buy programme to purchase a London apartment are most likely to be affected, according to Neal Hudson.
Households in London were permitted to borrow 40% of their property’s valuation, compared to 20% in the rest of the nation.
“The vast majority of loans that have been repaid in London have experienced a slight decline in value, which likely reflects the fact that flat prices in London have been relatively stable over the past few years and that the new-build premium tends to decline as well,” he explained.
He added, “We have not yet seen severe distress from owner occupiers [in the market], but Help to Buy London purchasers and shared ownership purchasers are the two groups I’m most concerned about over the next few months and years.”