Are you dreaming of turning the key in your very own place but struggling to rustle up a deposit? The Help to Buy Scheme consists of both an equity loan and an ISA and both can offer a way on to the property ladder.
In this blog, "Help to Buy: Explained", we'll cover the ins and outs and the pros and cons of the equity loan specifically.
For more information on the Help to Buy ISA and the Lifetime ISA, check out this article. And if you want to hear the detailed District 34 take on the Help to Buy equity loan, make sure you head over to our Community to read our latest 'Real Talk' article.
Help to Buy: Explained
Help to Buy Equity Loans are Government loans 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 varies depending on region. You can borrow:
Up to 15% in Scotland,
Up to 20% in England and Wales,
Up to 40% in London.
To benefit from this scheme the value of the property must be:
Under £200K in Scotland,
Under £300K in Wales,
Under £600K in England (including London).
Taking An Interest In The Interest
The money you borrow with a Help to Buy equity loan is interest-free for the first five years. Once this 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 comes sooner.
You can make voluntary part payments before the five-year period is over in 10% or 20% chunks. This could result in the loan being paid off before the interest rate kicks in.
These current 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?
Let’s imagine you are buying a home in England that costs £200K:
You would need to have a deposit of at least 5% of the property’s value = £10K.
With the Help to Buy equity loan, the Government can lend you 20% = £40K.
You would therefore need a mortgage to cover the remaining 75% =£150K.
The Help to Buy equity loan is tethered to the cost of your property, so 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 there are a few conditions:
You must not rent out your new home,
You must not own any other properties at the time of using the loan,
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 must carry out an assessment to ensure that you’re in a position to afford a mortgage for your proposed purchase.
What Are The Advantages 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
You can get access to better mortgage deals because you will need to borrow less money overall. And because you’ll need a smaller mortgage your chances of qualifying for one will improve
The interest rate you’ll need to start paying on the loan after the five-year period is quite competitive
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 Disadvantages Of The Help To Buy Scheme?
There’s a limited choice of homes because the scheme is only offered by some developers and is only available for new builds
Your loan will get more expensive
Your loan amount is not fixed and will fluctuate with the market value of your property.
Help to Buy Equity Loans in London
The scheme works in the same way in London, but you can borrow up to 40% of the value of properties that cost under £600K. The loan will be interest-free for the first five years. You therefore only need a 55% mortgage and a 5% deposit.
So for example, if you were to buy a house in London worth £400,000:
The Government could lend you up to 40%: =£160,000
You would to fork out a deposit of 5% of the property’s value: = £20K
You would then need to finance the rest with a 55% mortgage: = £220K
Weighing Up Your Options
So as you can see, there are clear pros and cons to this scheme, but if you are struggling to afford a new home and need a helping hand, then it might be right for you!