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 in England who want to buy a new-build house but are struggling to raise a mortgage deposit. The Government will lend you 20% of the value of the property (40% in London), and you’ll only have to put down a 5% cash deposit. Then you’ll need to get a mortgage to cover the rest.
The scheme opened for applications on 16 December 2020. It launched officially on 1 April 2021 and is due to run until 31 March 2023.
The maximum amount that property developers can charge for their homes (sold under this scheme) is capped by region, as follows:
- North East: £186,100
- North West:£224,400
- Yorkshire & The Humber: £228,100
- East Midlands: £261,900
- West Midlands: £255,600
- East of England: £407,400
- London: £600,000
- South West: £349,000
- South East: £437,600
In Scotland and Wales, there are similar schemes which we cover further down in this article.
How Does a Help to Buy Equity Loan Work?
Imagine you’re buying a home in the North West of 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
- And you’d be left with £168K (from your share of the sale) minus what’s still owed on your mortgage
How Do I Pay Back the Equity Loan?
The money you borrow with a Help to Buy equity loan is interest-free for the first five years. However, when the 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 Consumer Price Index (CPI) plus 2%.
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. But, if you want to reduce how much you owe, you can make voluntary part repayments of at least 10% of what your home is worth at any time. This could result in the loan being paid off before the interest rate kicks in in year six.
Can I Get a Help to Buy Equity Loan?
The Help to Buy equity loan scheme is open to all first-time buyers looking to purchase a new build home. But do bear these requirements in mind:
- You must not rent out your new home without Homes England’s consent
- You and anyone you’re buying the home with must not own or have owned any other properties in the UK or abroad
- 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 gross annual income
- You’ll have to pay a £500 fee to reserve the property
- 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.
- 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.
- You can rent out a room in your home as long as you continue to live in it.
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 2% plus any raise in the CPI (Consumer 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 as in the rest of England, 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.
Help to Buy in Wales
Help to Buy (Wales) is a shared equity scheme aimed at helping first-time buyers and existing homeowners in Wales buy a new-build house. The current scheme began to run in April 2021 and is due to end in March 2022.
The Welsh Government will lend you up to 20% of the property’s value. You’ll only need to provide a 5% cash deposit and get a repayment mortgage to cover the rest. Properties sold under this scheme must not exceed a market value of £250,000.
The money you borrow is interest-free for the first five years. Then, when this 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 or when you sell your property. But you can make voluntary part payments – known as ‘staircasing’ – at any time. These must be a minimum of 10% of your home’s prevailing market value.
Help to Buy in Scotland
Help to Buy (Scotland) is a shared equity scheme designed to help first-time buyers and home movers in Scotland buy a new-build house. The scheme was due to run originally until March 2022, but the Scottish Government closed it to new applicants on 5 February 2021. Any existing applications are still being processed.
If you bought a home in Scotland using Help to Buy, you can repay the money you borrowed from the Government whenever you like. Even though you’ll own at least 85% of your home’s equity, you can increase your share any time after you move in. This is known as ‘tranching up’ and must be done in 5% increments at least, each time.
With the main Help to Buy (Scotland) scheme now closed, there are still other alternatives available to help first-time buyers, such as the Help to Buy: Smaller Developers Scheme.
As you can see, if you’re looking to buy a new-build home, the Help to Buy equity loan could be a good option. However, make sure you think about how you’re going to pay it back after the initial five years. If you’re considering this option it’s worth contacting your local Help to Buy agent or registered builders for more information.