First time buyer guide
Help to Buy Equity Loan Scheme
What Is a Help to Buy Equity Loan?
It’s a Government loan designed to help first-time buyers or existing homeowners who want to buy a new-build house and are struggling to raise a mortgage deposit.
Depending on where you want to buy, the Government will lend you between 15% and 40% of the value of the property. You’ll only have to put down a 5% cash deposit and then get a mortgage to cover the rest.
The amount you can borrow is:
- Up to 15% in Scotland
- Up to 20% in England and Wales
- Up to 40% in London
To benefit from this scheme the price of the property must be:
- Under £200K in Scotland
- Under £300K in Wales
- Under £600K in England (including London)
The money you borrow with a Help to Buy equity loan is interest-free for the first five years. However, when the placid five-year period is over, you’ll have to start paying off your debt at a rate of 1.75% of the loan’s value. This rate will then increase every year in line with rises in the Retail Price Index (RPI) plus 1%.
You will need to repay your equity loan in full after 25 years, when you sell your property or when your mortgage term ends – whichever happens first.
You can make voluntary part payments – before the five year period is over – in 10% or 20% chunks whenever you like. This could result in the loan being paid off before the interest rate kicks in in year six.
But, bear in mind that these conditions are only available until April 2021 when a new Help to Buy equity loan scheme – which will run until March 2023 – will come into effect. The new scheme will only be available for first-time buyers and will include new regional property price caps.
How Does a Help to Buy Equity Loan Work?
Imagine you’re buying a home in England that costs £200K:
- You need to have a deposit of at least 5% of the property’s value: £10K
- With the Help to Buy equity loan the Government lends you 20%: £40K
- You need a mortgage to cover the remaining 75%: £150K
The Help to Buy equity loan is bound to the cost of your property, in other words: if the value of your house rises, so does your loan and if it falls, your loan will do so too. So now imagine that you decide to sell your home and its value has risen to £210K:
- You’d now have to pay back your 20% equity loan: worth £42K
- You’re now left with £168K (from your share of the sale) minus what’s still owed on your mortgage
Can I Get a Help to Buy Equity Loan?
The Help to Buy equity loan scheme is open to all buyers looking to purchase a new build home. But do bear these in mind:
- You must not rent out your new home
- You must not own any other properties at the time of using your Help to Buy equity loan to buy your new property
- You must provide a 5% cash deposit (5% of the total purchase price)
- Your mortgage must be a repayment mortgage, of at least 25% of the full purchase price, and it cannot be an interest-only mortgage
- You can’t use the scheme if you require a main mortgage that’s more than 4.5 times your household income
- The local Help to Buy Agent you use will carry out an assessment to ensure that you’re in a position to afford a mortgage for your proposed purchase
What Are the Pros of the Help to Buy Scheme?
- You might be able to buy a home sooner because you require a smaller deposit (5%)
- You don’t have to pay any interest on the loan for the first five years. But bear in mind you will still need to pay off your mortgage during this time, although no loan fees will apply.
- You can get access to better mortgage deals because you will need to borrow less money overall. Plus the fact you’ll need a smaller mortgage will improve your chances of qualifying for one.
- The interest rate you’ll need to start paying on the loan after the five year period is over (1.75%) is quite competitive, considering the current market rates.
- If you can afford to repay your equity loan early, you’ll save yourself from paying the 1.75% interest. The minimum voluntary repayment you can make is 10% of the market value at the time of repayment.
What Are the Cons of the Help to Buy Scheme?
- There’s a limited choice of homes because the scheme is only offered by some developers and only available for new builds.
- Your loan will get more expensive. While you will only pay 1.75% in your sixth year, this rate will then increase by 1% plus any raise in the RPI (Retail Price Index) every year.
- Your loan amount is not fixed and will fluctuate with the market value of your property. So, if your house rises in value you will have to pay more than you originally borrowed.
- Not all lenders offer Help to Buy mortgages so you will have to search around for the best deal.
Help to Buy Equity Loans in London
The scheme works in the same way, but you can borrow up to 40% of the value of properties that cost under £600K. Remember, the loan will be interest-free for the first five years. You’ll only need a 55% mortgage and a 5% deposit.
To break it down for you, if you buy a house in London worth £400K:
- the Government will lend you up to 40%: £160K
- you’ll need a deposit of 5% of the property’s value: £20K
- and a 55% mortgage: £220K.