Help to Buy and London Help to Buy
The following practical and independent guide gives you an overview of the Help To Buy scheme, who is eligible, possible pitfalls and questions you need to ask first, and how you can apply.
The Help to Buy: the basics
- The government will lend you up to 20% of the value of a property in the form of an equity loan. You will have to find a 5% deposit and secure a mortgage to cover the remaining 75%.
- If you live in London, the government will lend you up to 40% as an equity loan, meaning you only need to get a mortgage for 55% of the property value. For more on Help to Buy London see below.
- Covers new build properties valued under £600,000 only.
- Open to all potential and existing homeowners.
- There is no salary cap or joint income limit applied.
- It began on 1 April 2013 and was originally set to run until 2016. In 2015, however, the government announced it would be extended until at least 2020.
How does it work?
- With a 5% deposit saved, the Help to Buy equity loan scheme allows you to borrow up to 20% of the value of the property. You’ll then secure a mortgage to cover the remaining 75% of the cost of the property.
- This Help to Buy equity loan is interest free for the first five years, after which you will be charged a fee calculated at 1.75% of the equity loan plus 1%. The fee rate slowly increases year on year in line with the Retail Price Index. These repayments will sit alongside your mortgage repayments.
- If you can repay your equity loan within the first five years (which is highly recommended) you won’t have to pay any fees.
- Making part repayments, known as “staircasing”, will reduce your fees. It’ll also mean you are entitled to a greater share of the total sale proceeds when you sell. Paying it all off in a lump sum is also a great option if you can afford to.
- Once you find a property which operates within the scheme you’ll need to find a mortgage lender. Not all lenders offer Help to Buy mortgages. This means your choice of mortgage will be limited, but you can still get a good deal.
Help to Buy London
- Because house prices in the capital are so much higher than the rest of the country, the Government has introduced a London version of the scheme which allows you to borrow up to 40% of the property value as an equity loan.
- This means that after saving a 5% deposit you would need to secure a mortgage for the remaining 55%.
- Apart from this the scheme works in the same way as standard Help to Buy described above.
- The below illustration shows how the figures work for a £400,000 property.
- When you come to sell your house (or after 25 years) you will have to repay the equity loan amount back in full if you haven’t already done so.
- Remember this is an equity loan and, as such, the government will own 20% of your property. If house prices rise and the value of your property increases you will still owe 20% of the value of the property – which will now be a larger amount. On the other hand if prices fall that 20% will be worth less than it was originally.
Am I eligible?
Yes, if you have a deposit of 5% or more and a good credit history
Should I do it?
The HomeOwners Alliance welcomes this scheme as a way of helping people who might otherwise struggle to get on or move up the property ladder. But we do have some concerns, particularly around risks of negative equity, which buyers will want to bear in mind:
- It is more likely to make sense if you expect to stay in the property for a number of years. This is because new-build properties include an extra premium on the sale price that, like a new car, depreciates as soon as you buy it. If house prices fall, you may fall into negative equity and you may not have enough money from selling the property to repay the mortgage.
- You will benefit most from this scheme if you can pay off the equity loan within the first five years, before the fees kick in. You’ll need to look at your budget and see if you can afford to do this alongside making your mortgage repayments.
- Remember there are other costs involved when buying a home such as stamp duty and legal fees (see our guide on hidden costs). This potentially adds up to 7% of the cost of purchasing the property
- Be honest about the new builds you are looking at. You are going to be here for the next five years at least if you want to avoid negative equity – is there enough storage, are you expecting to start a family in that time, does furniture fit in the rooms?
- You’ll need to ensure you are able to afford a capital repayment mortgage alongside the fees and equity loan repayments (see our guide Mortgages made simple). Interest only mortgages won’t be available.
- Just because this is a government scheme doesn’t mean you’ll get any more protection. It is your responsibility to keep up repayments on the mortgage and equity loan.
How do I do it?
- Help to Buy equity loan homes are available from house builders that have registered to offer the scheme. Their advertising material should make it clear if Help to Buy homes are available on their development sites.
- To find your local Help to Buy agent click here
Help to Buy Mortgage Guarantee
A second part of the Help to Buy scheme, the Mortgage Guarantee, came to an end in 2016. The scheme saw the government guarantee up to 15% of a property’s purchase price, thus encouraging lenders to offer more small deposit mortgages.