Help to Buy – April 2021 to March 2023
The Help to Buy branding covers the government schemes set out to help people on to the property ladder including the help to buy equity loan, shared ownership and ISA’s. In this area we are going to focus on the Help to Buy Equity loan scheme.
The Help to Buy scheme is available for first time buyers on newly built properties.
The property needs to be registered for Help to Buy which is done by the developer or builder and they will normally advertise that the Help to Buy scheme is available on the property.
Here at Willow Brook Mortgages, we specialise in New build purchases and the Help to Buy scheme. We understand the timeframes you have to work towards and things that can be out of the ordinary with these types of purchase such as reserving a property and exchanging within 28 days, properties that aren’t ready to complete for 9-12 months, different warranty types, unusual construction types etc.
When speaking to us about your mortgage requirements, we can give you the maximum purchase price for Help to Buy and let you know your options including the scheme as well. We will also assist you with your Help to Buy application when submitting the mortgage application.
The Equity loan is from the government and counts towards your deposit so you will usually get a lower interest rate when purchasing using the Help to Buy Scheme.
You can borrow anywhere from 5% of the property value up to 20% or 40% in London. This percentage is based on the full purchase price of the property. It is a loan from the government so you will have to repay this amount, meaning that ideally you would look at the lowest possible percentage so that you have less to think about repaying in the future.
There are maximum Purchase prices based on where you are looking to buy a property:
|Region||Maximum property price|
|Yorkshire and the Humber||£228,100|
|East of England||£407,400|
You will need to put down a deposit of a minimum of 5% of the property purchase price.
An example of the Help to Buy Equity loan scheme:
Purchase of £250,000
Equity loan at 20% = £50,000
Deposit of 5% = £12,500
Mortgage for the remaining balance = £187,500
The mortgage you take will be on a repayment basis, so each month when you pay your mortgage balance you will bring down your balance that is left on the mortgage.
The equity loan is interest free for the first 5 years and then you start to pay an interest payment in the sixth year if it is still in place. This payment is only interest and will not bring down the balance.
The interest payment starts at 1.75% so following on from the example above, a purchase at £250,000 using 20% on the help to buy equity loan and a 5% deposit, would pay £73 per month in the sixth year. (Equity loan of £50,000 at 1.75% = £875 across the year so £73 per month). The interest amount will increase each year with retails price index plus 2%.
You can clear the equity loan at any point as long as it is cleared before the end of your mortgage full term which is normally up until retirement or a maximum of 30-35 years.
The equity loan tracks the property value so you will pay back the % you borrowed based on the property value when you pay it off. When looking to clear off any of the help to buy you will need to get the property valued by an approved surveyor.
How can I repay the equity loan?
- Savings, gift, inheritance or any lump sum
- You can add it in to your mortgage on remortgage if your affordability allows for this
- When you sell the property
These are the most common ways that people look to repay the equity loan. You will want to look at clearing off the equity loan as soon as possible.
Whilst you have the equity loan in place, you must live in the property and it does have to be your only property. You cannot let the property out without permission from Help to Buy.
You will also need to get permission from Help to Buy to do any work to the property that involved structural change such as moving walls, loft conversion, extensions etc. While they might give you permission to do this, you will also want to consider the value this would add to your property. Any increase in value will also increase the amount you have to repay on the equity loan because the equity loan tracks your property value. Where possible it is always advisable to clear off the help to buy before carrying out work to the property that would increase the value.
You can also repay the equity loan in part at a minimum of 10% of the property value at a time.
The Help to Buy Equity loan is a great scheme to help people on to the property ladder. It normally means you can purchase a larger property than when not using the scheme. This can mean that you won’t need to upsize in the future which would incur costs. As you only qualify for the First time buyer stamp duty relief on your first purchase it also means that you can take advantage of this further.
The main negatives would be that you have to repay the equity loan long term and it is based on a percentage of the property value, so if your property increases in value the equity loan will increase as well. It does also carry some admin fees for setting it up through your solicitors, a surveyor to value the property at the point of clearing and any management or admin fees at the point of clearing as well.