First Home Buying

 

First Time Buyer Guide


Help to Buy Equity Loan Scheme

Dreaming of opening the door to your very own home but struggling to save up for a big enough deposit? The Help to Buy Equity Loan scheme might just hold that key.
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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.

The Government lends you up to 20% (40% in London) of the value of the newly built property of your liking with a price of up to £600K. You’ll only have to put down a 5% cash deposit and then get a mortgage of at least 75% on the value of the property.

Since most mortals struggle financially over the first few years of buying a house, the money you borrow with a Help to Buy equity loan is interest-free for the first 5 years – although you’ll be pleased to know that you can make voluntary part payments whenever you like. However, when the placid 5-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%.

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 your dream home 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 of 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?

If you’re a first-time buyer or a home owner looking to move, the house your heart is set on is newly built and costs under £600K, you’re not going to sublet the new house and you don’t own any other properties at the time of using your Help to Buy equity loan to buy your new property, maybe.

Before you make any moves, though, you must take a close look at your financial situation. What’s your income? What are your expenses? Do you have any savings? Can you afford it? Have you considered other expenses: mortgage, insurance, solicitor, stamp duty? These alone could add up to 7% of the costs of buying your home.

Is the Help to Buy Equity Loan for Me?

  • The Help to Buy equity loan could be a good choice if you can afford additions to your payments in the future. Remember the charges that kick in after 5 years. Since you’ll also be repaying your mortgage, it’s something you should be well aware of.
  • If you’re lucky enough to afford repaying your equity loan before the 5-year period is over, you won’t have to pay the 1.75% interest. So, if you can afford to pay it all off in a lump sum, you’d be making a very smart move.
  • If you can “staircase” (make part repayments) your way through the interest-free period, your ongoing costs will be reduced and, when you sell your property, a bigger share of the final sale proceeds will be yours. However, every staircasing repayment will cost you a £200 administration charge.
  • Since not all lenders grant mortgages on Help to Buy houses, your choice of mortgage will be restricted within the scheme, but don’t panic, you can still get interesting deals. Just bear in mind that interest-only mortgages won’t be available, only capital repayment ones.
  • If you plan on living in your new home for some time, the scheme will make better sense to you since new-build properties do hold an extra premium on the sale price, a premium that decreases the very moment you make the purchase.
  • Don’t fall into the trap of thinking that, just because you’re in a Government scheme, you’re any better protected. You’re entirely responsible for your mortgage and equity loan repayments.
  • The amount you owe when the time comes to pay off your loan will depend on the freshest valuation of your home: if prices have risen you’ll owe the Government more money than you borrowed, whereas if they’ve fallen, you’ll owe less.

So, as you can clearly see, the equity loan scheme is beneficial mostly if you can afford to pay it off before the interest chips in.

Help to Buy Equity Loans in London

The scheme works just like the above, but, since house prices are so much higher in London, the specific version for the capital means that you can borrow up to 40% of the value of properties under £600K, remember: interest-free for the first 5 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 £160K, your 5% deposit will be £20K and your 55% mortgage £220K.