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Understanding the Help to Buy Equity Loan Scheme
What is the Help to Buy Equity Loan Scheme?
The Help to Buy Equity Loan Scheme was launched by the government in 2013 and has since gone through a number of changes. In 2021, the scheme became exclusive to first-time buyers only, and now enforces regional price limits.
This means that buyers can only use the scheme to purchase a home costing no more than the specified property price cap in their region. This is to ensure that the scheme reaches the people who need it most.
The regional price caps are as follows:
Regional price caps:
- North East - £186,100
- North West - £224,400
- Yorkshire and the Humber - £228,100
- East Midlands - £261,900
- West Midlands - £255,600
- East of England - £407,400
- London - £600,000
- South East - £437,600
- South West - £349,000
In order to be eligible for the Help to Buy Equity Loan Scheme, you must tick the following boxes:
- You must be a first-time buyer
- You must be purchasing a new build from a registered Help to Buy builder
- You must be purchasing a new build costing no more than your regional price cap
- The new build must be the only property you own and your main residence
How does the Help to Buy Equity Loan Scheme work?
When you make use of the Help to Buy Equity Loan Scheme, the government lends you up to 20% of the cost of your new build home (up to 40% in London), so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest (up to 55% in London).
Here's an example
Property purchase price - £240,000
Buyers cash deposit (minimum 5%) - £12,000
Government equity loan - £48,000
Mortgage remaining (minimum 75%) - £180,000
The great thing about this scheme is that your equity loan is 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 and your equity loan must be fully repaid upon sale of the property from the sale proceeds, or after a maximum of 25 years. Your Help to Buy agent will contact you to set up these monthly fee payments. You’ll also get a statement about your loan each year.
Because the government owns 20% of what your property is worth (rather than what you paid for it), if your property increases in value over the years, so does your equity loan.
Why use the Help to Buy Equity Loan Scheme?
- You require a small deposit (5%) which means lower upfront costs
- Your budget may allow you to buy a bigger home, or one with a higher purchase price
- There’s no interest to pay on your equity loan for the first five years
- With a loan guaranteed by the government, you will likely qualify for a wider range of mortgages as you are less of a risk to the lender
- Similarly, you may be able to access cheaper mortgage rates
Things to be aware of
- After five years, the equity loan will become payable monthly (interest only)
- The equity loan is not fixed
- You can only buy new build properties
- You will be limited by the price cap in your region
- You can only borrow from certain lenders
Repaying your Help to Buy Equity Loan
Even at the beginning of your Help to Buy journey, it’s important to consider how repaying the equity loan will work. Remember that your loan amount is not fixed as it is based upon the market value of your property, which may have increased or decreased since purchasing. You may eventually have to pay back a higher amount than you originally borrowed so you will need to have your home valued before you plan any repayment to your equity loan.
Here's an example
|Market value of your home||Equity Loan||Amount|
|Bought for £200,000||20%||Borrowed £40,000|
|Sold for £250,000||20%||Pay back £50,000|
You may decide to staircase out of your equity loan. This is when you pay off part of your equity loan. You can pay either 50% or 100% of the outstanding sum. In London where the equity loan can be up to 40% of the purchase price, you are able to pay it off in four 10% increments instead.
Here's an example
|Market value of your home||Percentage||Amount|
|Bought for £200,000||Borrowed 20%||£40,000|
|Value at time of payment £220,000||Paying back 10%||£22,000|
You could also remortgage to pay off your equity loan. This is one of the most popular options. You could either:
- Transfer your existing mortgage to a new product and/or lender and keep your full equity loan
- Remortgage for a higher amount to repay your existing mortgage and all of the equity loan, giving you full ownership of your property
- Remortgage for a higher amount to repay your existing mortgage and partially repay your equity loan
Read more on remortgaging Help to Buy.
How can Mortgage Light help?
At Mortgage Light, we are experienced and knowledgeable on the Help to Buy schemes. They can be a confusing and tricky thing to navigate, so we’re here to make it much easier for you. If you’d like to have a chat with one of our experts to understand more about the scheme and whether it’s the best option to meet your circumstances, get in touch with us. We’re always happy to help.