Help to Buy is a government scheme which can help first time home buyers get a property with just a 5% deposit.
How does Help to Buy work?
The purchase price must be no more than £600,000. Under this scheme, purchasers can borrow 20% of the purchase price interest-free for the first five years as long as you have at least a 5% deposit. If you live in London, you can borrow up to 40% of the purchase price. For the purpose of this article, and as we operate in the Midlands area of the UK, there will be no further references to London.
The Government has confirmed it will extend its Help to Buy equity loan scheme from 2021 to 2023. However, this extension will be restricted to first-time buyers purchasing newly built homes.
From 2021, there will also be new regional price caps which could reduce the maximum value of homes that can be bought through the Equity Loan Scheme.
Who can’t apply for the scheme?
- You can’t use the above schemes to buy a second home or a property to rent out.
- If you use Help to Buy, you can only take out a repayment mortgage.
- You can’t buy a property for more than the set price limits (see below).
How ‘Help to Buy’ Equity Loans work
- You need at least 5% of the sale price of your new-build flat or house as a deposit.
- The government lends you up to 20% of the sale price.
- You borrow the rest (up to 75%) from a mortgage lender, on a repayment basis.
- The equity loan must be repaid after 25 years, or earlier if you sell your home.
- You must repay the same percentage of the proceeds of the sale as the initial equity loan (i.e. if you received an equity loan for 20% of the purchase price of your home, you must repay 20% of the proceeds of the future sale).
Cost of home – £200,000
|Cost name||Percentage of total||£ value|
The interest rate you will be charged
You don’t pay any interest or fees on the government’s equity loan for the first five years. In the sixth year, you’ll be charged 1.75%.
After then, the fee rises by inflation based on the Retail Prices Index (RPI) plus 1% each year. RPI figures are put together by the Office for National Statistics.
See below for an example of how the fees work.
Interest rates for paying back your loan
Years 1-5: no fees
Year 6: 1.75% of the loan
Year 7 onwards: 1.75% + RPI + 1%
These fees do not go towards paying off the government loan.
When you sell your home, or the mortgage is paid off, you have to repay the equity loan plus a share of any increase in the value. It works like this:
Home bought for £200,000, sold for £250,000
|Increase in value||25%|
|Equity loan repayment||£50,000 (£40,000 + 25% profit)|
|Mortgage||£150,000 (less capital repayments)|
|Your share||at least £50,000|
The remaining £50,000 (or more) can be used as a deposit on your next home.
The exact amount depends on how much you’ve paid off your mortgage.
You can also pay back part or all of your loan at any time.
The minimum percentage you can pay back is 10% of the market value of your home.
The amount you pay will depend on the market value at the time.
Is Help to Buy for you?
Although Help to Buy may give purchasers the opportunity to purchase a new build home that they may not otherwise be able to afford, there are some limitations to carefully consider.
The loan will become more and more expensive. Although you will benefit from five years without interest, after this time the rate of interest applied to your loan will increase each year. While you will only pay 1.75% in your sixth year, each year your loan fee will increase by 1% plus any RPI increase.
The creeping cost of fees could be storing up a problem you will be forced to deal with further down the line. Should RPI increase dramatically, so could the rate of interest applied to your loan.
The loan is not fixed. The amount you will ultimately need to repay on your Help to Buy equity loan is not fixed. Instead it will fluctuate with the market value of your property because it is percentage-based. This means that if your house has risen in value you may be eligible to pay significantly more than you originally borrowed.
Purchasers must look at their own situation and personal circumstances very carefully and ask for professional advice from a mortgage broker if necessary.
*Statistics and examples in this article have been taken from www.moneyadviceservice.org.uk