Learn all you need to know about the government's Help to Buy: Equity Loan scheme, including regional differences, price caps and more.
What is Help to Buy?
The Help to Buy equity loan is a government scheme that is currently available for home seekers looking to buy a new build property.
Introduced in 2013; the equity loan is a five-year, interest-free loan that is currently open to all home seekers - including existing property owners. There are plans, however, to restrict the scheme to first-time buyers only as of April 2021, with regional price caps also being introduced.
At present, you'll be able to qualify for the scheme as long as the property is a new build, valued under £600,000, and you have saved at least a 5% deposit.
The Help to Buy loan allows you to use a 5% deposit and borrow up to 20% of the property's value, meaning you will only need a mortgage for the remaining 75%.
While the following guide will cover the Help to Buy scheme in general, there are some differences with the scheme in London, Scotland & Wales. For more information about London and national differences, please click on the respective links above.
The Fine Print
How Does it Work?
As mentioned above, the Help to Buy: Equity Loan allows you to borrow up to 20% of the properties value from the government in the form of a five-year, interest-free loan.
The purpose of the Help to Buy: Equity Loan is to encourage more people to buy new build properties by reducing the amount of cash deposit they'll require down to just a minimum of 5%. However, beyond the no-brainer of reducing your upfront costs when buying a home, there are some important aspects of the loan that you need to consider to make sure it is the right option for you.
One of the words you will repeatedly hear in the video above is "per cent". It's important to make the distinction that the money you borrow from the government is not a set amount, but simply a percentage of the property's current value.
How to Pay Back the Loan
Considering that the Help to Buy loan has an interest-free period of five years, we would strongly recommend that you repay as much of the loan as possible before this period ends. You do, however, have a 25-year window in which to pay the equity loan.
Making partial repayments over the duration of the loan (referred to as 'staircasing') is possible to help to reduce the amount you owe to the government, while also reclaiming a greater percentage of ownership of your home. However, please note that while you can make repayments at any time, you will need to make a minimum repayment of 10% of the current value of your home.
Should you decide to pay after the interest-free period has ended, you will have to pay an additional 1.75% of interest (in year 6) or 1.75% + Retail Price Index (RPI) + 1% (years 7 onwards) on-top of the minimum 10% due.
Unlike a regular loan repayment plan, staircasing will require you to get your property revalued by an independent valuer every time you make payment. Naturally, hiring an independent valuer will incur a fee (approx. £200) on top of the amount you repay towards the loan.
It's important to remember that as the 20% Help to Buy loan is based on the current value of your home, every payment you make, will require you to have your house revalued to ascertain how much the government's percentage is worth and how much you need to pay to meet the minimum 10% repayment threshold.
The Disadvantages of the Help to Buy: Equity Loan
As touched on above, one of the most glaring disadvantages with the Help to Buy: Equity Loan scheme is the fact that the amount borrowed from the government is percentage-based, relevant to the current market value of your home.
In practice, what the percentage means is that the balance owed is never a set figure. Instead, it is a percentage of whatever the current market value of your home may be.
If for some reason you're unable to clear your equity loan within a short time frame, you may end up being faced with a significantly larger loan repayment due to fluctuating house prices. As such, it's vital that you pay off the equity loan as soon as possible (and before conducting any renovations on the property) in order to prevent yourself from market fluctuations.
In addition to the percentage-based equity loan, you should also be aware of the following aspects of the Help to Buy: Equity Loan;
You can only buy a property that fits within the price cap.(currently at £600,000 in England)
While the loan is available to current homeowners, you cannot use the scheme to buy a second home and subsequently rent out your existing property.
You are not able to use the Help to Buy scheme if you already own land with residential planning use.
There is a £1 management fee every month until the loan is repaid.
After the five-year interest-free period has ended, you'll be charged 1.75% on the outstanding amount as interest. This fee will increase each year by RPI (Retail Price Index) plus an additional 1%.
You'll only be able to take out a repayment mortgage as opposed to a fixed-rate mortgage.
You won't have to repay the equity until you sell your home, or you reach the end of the loan's 25 year period (whichever comes first).
Selling a Help to Buy Property
The major pain points of the percentage-based nature of the equity loan will become most apartment should you decide to sell your home.
As highlighted in the repayment section above; if you were to sell your home, you would owe the government 20% per cent of the current market value of your property. However, if you were to sell your property for a profit (without first staircasing) you'll end up paying back more money than the 20% was initially worth when you bought your home.
For example, if you bought the property for £400,000 - your equity loan of 20% would be valued at £80,000. However, if you later sell your home for £900,000, after a boom in the market and a series of renovations (without making any loan repayments) you would owe the government £180,000, (20% of the current market value).
While the equity loan will often result in you paying more money to the government than their 20% was initially worth when buying the home; it is, however, worth noting that should the value of your home depreciate by the time you're ready to sell, the amount you owe will also be reduced.
Help to Buy in different Regions:
Help to Buy: London
For the most part, the London version of the Help to Buy: Equity Loan works much in the same way that it does in the rest of England, with just one main difference.
Unlike in the rest of the country, due to the higher house prices throughout the capital, the London Help to Buy scheme offers a government loan of 40% rather than the 20% offered elsewhere. This, therefore, means that at most, you'll only have to secure a 55% mortgage if you were to go in with the minimum 5% deposit.
As with the rest of England, the London Help to Buy: Equity Loan is only available for newly built homes, and you'll only have to pay back the loan (not including management fees and interest charges) after 25 years or should you sell the property.
At present, Aldermore, Bank of Scotland, Barclays, Halifax, Leeds, Lloyds, Nationwide, NatWest, Newcastle, Royal Bank of Scotland, Santander, Teachers and TSB all offer mortgages for the London Help to Buy scheme.
To learn more about the London Help to Buy Equity Loan and the currently available properties, please visit the Help to Buy agent website or call 03333 214 044 for further information.
Help to Buy: Scotland
Help to Buy in Scotland is broken down into two individual schemes; the Affordable New Build scheme and the Smaller Developer scheme. Depending on the size of the housebuilder that you're purchasing from, you'll be placed into one of the schemes, both of which operate in the same way - giving you 15% off the purchase price of your new home.
Like England, the Scottish Help to Buy systems also have a price threshold; however, it is considerably lower than the English valuation, at just £200,000.
At present there are 16 lenders offering mortgages for the Help to Buy scheme in Scotland, there are as follows:
Help to Buy: Wales
The Help to Buy: Equity Loan scheme works the same in Wales as it does in England (including the 20% equity stake) with the main difference being the price limit of the property you can buy.
Presently in England, you can buy a home up to £600,000 under the scheme, whereas in Wales the maximum price is half that, at £300,000.
The Welsh Help to Buy scheme is currently due to end in December 2021- To apply for the scheme, please download the form here.