As a first-time buyer, getting onto the property ladder can seem impossible, especially if you’re trying to put away money for a deposit whilst renting. The good news is that there are a few schemes that the British Government has put into place to make buying your first home a little easier. An example of this is the Help to Buy Equity Loan.
The Help to Buy Equity Loan was initially set up to help people get onto the property ladder and buy their first home, although it’s currently open to all homeowners who are looking to move. It’s only available on new build properties in England, and the new home must be your main residence and only property. Similar schemes are available in Wales and Scotland but are subject to slightly different rules.
The Help to Buy scheme was set up in 2013, and was originally planned to run until March 2021. It has since been extended to continue into 2023, however, this extension will be restricted to first-time buyers. From 2021, new regional price caps will be put into place which may reduce the maximum value of homes that can be bought through the Equity Loan Scheme.
The Help to Buy Equity Loan is different from the Help to Buy ISA, which is now closed to new accounts.
How does the Help to Buy scheme work?
The Help to Buy Scheme allows you to buy any new-build in Britain that costs below £600,000.
Not everybody is entitled to this loan. In order to access the Help to Buy Equity loan, you must:
- Be a first time buyer or someone buying a new home
- Be buying a new build house or flat from a registered Help to Buy builder
- Be buying a property valued below £600,000
- Have a minimum 5% cash deposit ready
You won’t be able to access the Help to Buy Equity Loan if:
- You want an interest-only mortgage
- You are buying a second home
- You need to part exchange your current property
- You’re looking for an overseas property
You need to put down a minimum 5% cash deposit, and then you’re provided with an equity loan from Homes England. This loan can be up to 20% of the value of the property (40% in London), which makes up the rest of your deposit. The remaining 75% of the value of the property (55% in London) is funded by a mortgage.
For example, if the property was on the market for £180,000, you would put down a cash deposit of 5% (as a minimum) of this value, which is £9,000. You would then be provided with an equity loan of 20% (as a maximum) of the market value of the property, which is £36,000. You would then need to take out a mortgage to cover the remaining 75% of this value, which is £135,000.
How do you repay the loan?
Your equity loan is provided interest free for the first five years. After five years, you’ll incur a fee of 1.75% of the loan value and this fee increases each year by a further 1%, plus any increase in the Retail Price Index. This fee does not contribute towards the repayment of the loan amount.
You must pay back the loan after 25 years or when you sell your home – whichever comes first. The amount you repay will depend on how much your home is worth. If your property increases in value over time, so does your equity loan.
You can pay back part or all of your equity loan at any time, paying either 50% or 100% of the outstanding equity loan sum (however doing this will usually incur a fee). In London where the Help to Buy equity loan can be up to 40% of the purchase price, you are able to pay it off in four 10% increments instead. You could consider using a large amount of savings, inheritance money, a bonus or a cash gift to pay off your loan – or you could pay it off through remortgaging.
If you want to read more about the Help to Buy Equity Loan, you can download our Help to Buy Guide.
How can Mortgage Light help?
When you look to buy your home, it’s normal to search extensively across multiple websites to make sure you’re finding the right property, rather than buying the first one you find online. The mortgage product you enter into should be bought with the same consideration, and this is where we at Mortgage Light can help. We have access to the whole market and all the experience to know where to place you to get the best deal for your situation.
We’ll make the process much easier when mortgaging or remortgaging with Help to Buy. Our experienced team will be able to guide you through, answer all your questions, and help you find a mortgage that works for you. If you want to talk to an advisor about Help to Buy mortgages, get in touch with us today.