Help to Buy equity loan (Ulitmate guide)
What is the Help to Buy equity loan??
The Help to Buy equity loan scheme is a government first-time buyer scheme that requires a minimum 5% deposit and after which the Government will provide you another 20% ( or 40% if you are buying within London) in the form of a 5-year interest-free loan(after which it is 1.75% per annum). You can only get the help to buy equity loan with a standard repayment mortgage, not a buy to let mortgage or commercial mortgage.
If you want to see how much you could potentially borrow with the help to buy equity loan then you should consider using a help to buy calculator.
This interest rate then rises each year by the retail prices index(RPI) inflation measure + one percentage point. Assuming RPI is 4%, the interest rate would rise by 5% (4% + 1%). It is important to note that you only pay the interest from year 6 and not the capital repayments itself. This means you will be required to make monthly interest repayments on your help to buy equity loan from the 6th year.
The Help to Buy equity loan is only available for new builds. In England, it’s only available for those buying a new build worth less than £600,000 (£300,000 in Wales, and £230,000 in Scotland). The scheme was set up to increase the supply of affordable housing in the UK. The help to buy equity loan is competitive as the 5% + 20% deposit puts you in a better Loan to Value band and hence a cheaper mortgage. The Help to Buy equity loan scheme is accepted as an addition to your mortgage deposit by most mortgage lenders in the UK.
Interest-free for life Help to Buy equity loan in Scotland.
The Scottish Government are more generous and will never charge any interest but rather they will retain 20% of the property value when the property is sold.
This means that if property prices rise the government can make some money from that rise and vice versa.
Paying the Government back
You can pay back some or all of your equity loan without selling your home. You can make a partial payment called ‘staircasing’. This will only be accepted if it is 10% of the current property value or you are clearing the whole of the mortgage with the lender.
**Example of the help to buy equity loan. **
A home costs £400,000. You provide a 5% deposit of £20,000 and the government loans you another £80,000(20%). You then take a mortgage of £300,000(75%). The government loan effectively pushes down your LTV and ensures the loan is affordable.
Tip: combine the Help to Buy Equity loan with the Help to Buy ISA for maximum effect
Help to buy equity loan FAQs
Below we will answer some of the most common questions about the help to buy equity loan.
How do I get a help to buy equity loan?
To get a help to buy equity loan you will first need to ensure you meet the eligibility requirements based on what country you are applying from. If you are applying from England then the property will need to be valued at no more than £600,000 and you will need to be a UK resident, not own another property and have at least a 5% mortgage deposit.
If you meet these requirements you can then apply to your loan help to buy agent. They will ask you to fill in a help to buy property information form and a first-time buyer declaration which states that you do not own any other property in the world. If you pass all the checks they will let you know that you are eligible for the help to buy equity loan and give you an authority to proceed letter or similar.
Can you remortgage to pay off help to buy equity loan?
Yes, you can remortgage to pay off the help to buy equity loan but you can either make a partial repayment of the help to buy equity loan or a fill repayment. The minimum you can repay of the help to buy equity loan is 10%. Remortgaging to pay off the help to buy equity loan is the route most borrowers will take but you should remember that as help to buy equity loans can only be used on new build properties and new build properties are usually sold at a price which is usually 15% higher than the properties market value, you will almost certainly face issues when the time comes to remortgage as you may have negative equity.
Negative equity is when the mortgage on your property is higher than the property value. This means you have no equity in the property and you are unable to remortgage and pay off your help to buy equity loan
Can you use a help to buy ISA with an equity loan?
Yes, you can use your help to buy ISA with an equity loan but you will need to meet the eligibility requirements of both of these government schemes.
What is the interest rate on help to buy equity loan?
The interest rate on help to buy equity loan is 0% for the first five years, after which the interest rate is 1.75% on the outstanding loan. The interest rate on the help to buy equity loan will then increase each year by RPI + 1%.
What is the London Help to Buy equity loan??
Due to the rising house prices in London, the Government decided to increase the loan amount it gives prospective buyers in London from 20% to 40%. This kicked in back in February 2016 but not so many people are yet aware of it.
So is the London Help to Buy equity loan any different?
Well no, the Help to Buy equity loan scheme is pretty much the same apart from the loan limit being raised from 20% of the property price to 40% of the property price. If you have 5% of your mortgage deposit the Government will give you up to 40% of the property value as an interest-free loan for 5 years.
There is no interest charged on the loan for the first five years but after which you begin to pay just the interest charge of 1.75%. This then rises each year by the retail prices index (RPI) inflation measure + one percentage point. Assuming RPI is 4%, the interest rate would rise by 5% (4% + 1%).
What’s wrong with the Help to Buy equity loan scheme? Is it the best idea for you?
The government’s Help To Buy equity loan scheme seemed like a welcome help for those first time home buyers struggling to save for that ever-elusive deposit, save 5% and the government will lend you up to 40% towards your deposit in London and 20% in the rest of England & Wales by way of an equity loan.
You get 5 years of no interest or having to make payments then in year 5 you start to get charged interest and need to start thinking about repaying the Help To Buy equity loan which if the property is increasing in value will also increase the amount you have to repay back to the Government(in property value).
The Help to Buy equity loan scheme is only available on new Build homes for first time buyers or new build homes for those already first time buyers who want to move up the property ladder.
Can you use this help to buy equity loan on an older property where you can add value?
The Help to Buy equity loan is fine if you don’t want to move into an older property where you could negotiate a better purchase price or an older property that you could add value to by way of installing a new kitchen or bathroom.
Was the help to buy equity loan scheme really designed for you?
No, the help to buy equity loan scheme was designed to get housebuilders building, following the 2008/2009 financial crisis when banks stopped lending money to most potential homebuyers and insisting that those that meet their very strict criteria had much larger mortgage deposits such as 25%.
The high LTV (loan to value) mortgages vanished and this stopped developers from building. Could we blame them? why would developers build properties if banks were not going to give home buyers mortgages to buy the properties?
When using the Help To Buy equity loan scheme your ability to negotiate the purchase price is slightly removed and you may have to pay the price which is set by the developer as there will be other potential first-time buyers who want to purchase the same properties.
The help to buy equity loan from 2021
In autumn 2018 the then chancellor of the Exchequers, Phillip Hammond announced that the help to buy equity loan scheme will change from April 2021.
Some of the changes include:
The help to buy equity loans will only be available to first-time buyers and no longer to home movers.
The maximum amount you can borrow with the help to buy equity loan will also be capped based on your region.
This will be set at 1.5 times the regional average first-time buyer price forecast in Autumn 2018, meaning the maximum property price you’ll be able to take out a Help to Buy loan on will be:
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
South East £437,600
South West £349,000
In this brief guide, we discussed the help to buy equity loan. If you have any questions please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.