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Help to Buy equity loan scheme explained

The Help to Buy equity loan is a government scheme that lends you up to 20% of the value of a new build home you want to buy, interest-free for the first five years – but there are some serious pitfalls that you need to consider

What is the Help to Buy equity loan?

The government’s Help to Buy equity loan is available for people who want to buy a new build property – and it’s interest-free for the first five years. All potential and existing homeowners are eligible, as long as the property is a new build, it’s valued under the set price cap (currently £600,000) and you have at least 5% saved for a deposit.

With a Help to Buy loan, you can borrow up to 20% of the value of the property, which means that you could buy a home with just a 5% deposit, and a mortgage for the remaining 75%. In London, the rules are different and you can borrow more.

The scheme opened on April 1 2013, and has been extended up to 2023. It’s important to be aware that on April 1, 2021, the scheme is being restricted to first-time buyers only and new regional price caps will be introduced (outlined below). These changes mean that anyone who already owns a property and hopes to benefit from Help to Buy must do so before April 2021.

Help to Buy for a £200,000 property

Help to Buy for a £200,000 property

What about Help to Buy in London?

Because house prices in the capital are so much higher than the rest of the country, the Government 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 difference, the scheme works in the same way as standard Help to Buy described above.

Help to Buy infographic for London

See how Help to Buy works in London, on a property worth £400,000

Help to Buy price caps

From April 2021, and until its end in March 2023, Help to Buy equity loans will only be available to first-time buyers – and will be subject to regional price caps. These caps are set at 1.5 times the current forecast regional average.

REGION UP TO MARCH 2021 FROM APRIL 2021
North East £600,000 £186,100
North West £600,000 £224,400
Yorkshire and the Humber £600,000 £228,100
East Midlands £600,000 £261,900
West Midlands £600,000 £255,600
East of England £600,000 £407,400
London £600,000 £600,000
South East £600,000 £437,600
South West £600,000 £349,000

See these regional price caps on a map

help to buy regional prices

What restrictions are there with Help to Buy?

There are some restrictions with Help to Buy, which include:

  • You can only take out a repayment mortgage
  • You can’t buy a property for more than the set price limits
  • You can’t rent out your existing home and buy a second home through Help to Buy
  • You can’t buy a Help to Buy property if you already own land with residential planning use
  • You can’t purchase a Help to Buy home whilst your name is attached to the deeds or if you will benefit financially from the future sale of a property even if you do not live there
  • From April 2021, you can only benefit if you’re a first-time buyer

How does the Help to Buy equity loan work?

There are a few things that you need to understand about how the Help to Buy equity loan works:

  • You borrow a percentage of your home’s value, not a fixed amount
  • If your home increases in value, so does the amount that you owe – the same is also true if the value falls
  • You’ll need to pay a £1 management fee every month until the loan is repaid
  • The first five years of the Help to Buy equity loan is interest-free
  • After the interest-free years, you’ll be charged 1.75% on the outstanding amount as interest. This fee will increase each year by RPI plus 1%
  • You only repay the interest, not the equity. If you want to make a dent in the amount you owe, you need to make ‘staircasing repayments’, outlined below
  • You don’t have to repay the equity until you sell your home, or you reach 25 years (whichever is earlier)

How do you repay Help to Buy?

Since the Help to Buy loan is interest-free for the first five years, it’s advisable to repay as much as you can before this period ends. You can make part repayments, known as “staircasing”, to reduce your ongoing costs when the interest-free period ends, and to start paying off the equity you’ve borrowed. Staircasing will also mean that you’re entitled to a greater share of the total sale proceeds when you sell.

Things you need to know about staircasing:

  • You can make repayments at any time
  • Repayments must be at least 10% of your home’s current market value
  • Staircase payments may be subject to other criteria set by your lender
  • Every time you want to make a repayment, an independent valuer must assess your property – and you’ll have to pay for this (£200)

Get free advice from London & Country now

Can I remortgage?

After the interest-free five-year period, you may want to remortgage and either keep the equity loan from the government, or use a new mortgage to repay the Help to Buy loan. The latter option will increase the size of your standard mortgage, but you’ll find more lenders and options available to you.

Some homeowners will choose to remortgage and repay the equity loan because it means they will benefit from any increase in value – but they should beware that it may mean the monthly mortgage repayments go up.

What you should know about remortgaging with a Help to Buy equity loan:

  • If you want to remortgage, you’ll need to pay a £115 administration fee to Homes England.
  • Homes England’s Mortgage Administrator will need to approve any increase in your first charge mortgage.
  • When paying back the equity loan, either through staircasing or when you come to sell your home, the sum you owe will depend on the most recent valuation of the property.
  • Not all lenders offer mortgages on Help to Buy homes. If you want to remortgage to get a better deal, while keeping the Help to Buy equity loan, you’ll find a much smaller range of products available to you.

Can I sell my Help to Buy home?

You can sell your home bought with the Help to Buy equity loan at any point. If you still owe money on the equity loan, this will need to be paid from a share of the sale’s proceeds. For example, if Homes England assisted your purchase with a 20% contribution, your repayment will be 20% of the total market value when the home is sold.

You should be aware that if the value of your home has increased, the amount you need to repay will also increase. For example, let’s consider a home worth £200,000 and bought with a 20% government equity loan worth £40,000. If the value rose by 10% to £220,000, the amount borrowed would also grow by 10% and you’d need to repay the government £44,000 – an extra £4,000.

However, if the value of the home falls, then the amount you owe would also fall.

Is the Help to Buy scheme right for me?

There are many pros and cons to the Help to Buy scheme. 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 there are some concerns, particularly around risks of negative equity, which buyers will want to bear in mind:

  • New build properties depreciate, in the same way that a brand-new car does. You need to beware of house prices dropping and the risks of falling into negative equity
  • You will benefit most from this scheme if you can pay off the equity loan within the first five years, before the interest kicks in.
  • 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
  • You need to ensure you’re 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 for people buying with this scheme.
  • Just because this is a Government scheme it doesn’t mean you’ll get any more protection. It is your responsibility to keep up repayments on the mortgage and equity loan.
  • If the home you are buying is leasehold, make sure that you ask your conveyancer to scrutinise the contract and look out for any onerous terms such as escalating ground rent. See our guide for more on leasehold problems.

Which properties are eligible for Help to Buy?

There are strict eligibility criteria for Help to Buy properties:

  • It must be a new build
  • It must be worth up to £600,000
  • It must be your only residence

What is Help to Buy shared ownership?

Shared ownership is a different scheme that allows buyers to own a share of a property while renting the rest of the property from a housing association or developer.

How do I apply for Help to Buy?

It’s important to get independent financial advice before you apply for the Help to Buy scheme, as there may be another option that is better-suited for your personal circumstances. You can talk to mortgage broker London & Country for free on 0800 073 2326.

If you want to go ahead with a Help to Buy application, there are five steps to the process:

  1. Find an eligible new build and a local Help to Buy agent
  2. Prepare to pay the associated fees:
    1. A reservation fee (minimum £500)
    2. A deposit on exchange of contracts (at least 5% of the property’s value)
    3. Conveyancing fees and other costs due on completion
  3. Complete a Help to Buy “Property Information Form”, available from the house builder.
  4. Reserve the home
  5. Send the signed Property Information Form and a copy of the builder’s signed reservation form must to the Local Help to Buy Agent.

You’ll then need to go through the new build conveyancing process, and your conveyancing solicitor will need to liaise with the Help to Buy agent at a few key points when you’re buying your new home.

Find out more about government support for buying a home


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9 Comments

  1. Hi Denise,
    We’d love to help if we can. Get in touch with us on hello@hoa.org.uk or 033 0088 2051
    Thanks,
    Angela
    HomeOwners Alliance

    Comment by AKerr — October 4, 2017 @ 9:31 am

  2. After 2 years into the help to buy scheme we have decided now is the time to repay the loan but we are finding the cost of doing so prohibiting. Although there may not be any “fees” the cost of getting a valuation plus solicitors costs and administration fees this could amount to approximately £1,800. This was not explained at the time of taking out this loan.

    Comment by D Harrison — October 3, 2017 @ 12:36 pm

  3. Your information staates that when you start to pay the equity loan back to Government it would be initially 1.75% PLUS 1%

    What is that other 1% as when I have asked that question specifically to an HTB financial advisor they assured me it would only be the 1.75%?

    Thanks

    Comment by Ms Light — June 2, 2017 @ 1:33 pm

  4. URGENT HELP- CIRCLE/CLARION(NEW MERGER) HOUSING ASSOCIATION TENANT (MOBILITY DISABILITY, VISUAL IMPAIRMENT)- FLAT ADAPTATIONS, MANTAINANCE IGNORED YEARS OF DISREPAIR ON RESIDENTIAL PROPERTY SINCE 1995-2017
    WHAT DO I NEED TO OBSERVE AND ASK FROM HOUSING ASSOCIATION SURVEYOR?
    WHEN CAN I REQUEST AN INDEPENDENT SURVEYOR OUTSTANDING REPAIRS REPORT?
    HOW CAN I ENSURE ACCURATELY MY FLAT IS SURVEYED FOR GOVERNMENT HOME BUYING SCHEME- DISCOUNT ON PURCHASE BASED ON TENANT YEARS OF MAINTAINING TENANCY?
    IN CURRENT 2017 THERE ARE MANY SCHEMES, THIS ASSOICATION FAIL TO ACCURATELY INFORM ME OF WHICH SCHEME I QUALIFY FOR,
    DISCOUNT % REDUCING THE PURCHASE DISCOUNT?
    I AM CONFUSED BY SURVEYORS AND THEIR ROLE IN THIS PROCESS.
    PLEASE CAN YOU ADVISE, DIAGNOISIED IMPAIRMENT IMPACTS ON THE ADJUSTMENTS REQUIRED FOR MY PLACE TO LIVE.
    KINDEST REGARDS
    VAL WHITE
    07802518472
    02072811971

    Comment by valerie c white — May 17, 2017 @ 2:50 pm

  5. I have just read through your guide and part way through it starts writing about new-build properties. Is this scheme for new-build only and if so wouldn’t it be best to say that at the outset?

    Comment by Mike Jenn — April 13, 2017 @ 12:08 pm

  6. Hi,

    I’m hoping to learn more about prepayment penalties for equity loans. Are you able to explain?

    Thanks

    Comment by Ellena — April 2, 2017 @ 9:09 pm

  7. Hi Matthew,

    Thanks for your query. The options available are largely dependant upon your other personal circumstances and would need to be discussed. Do consider becoming a member and we would be happy to work through this with you. Also have a look at information on our guide: Help to Buy Mortgage Guarantee and you may also enquire here:Find your local Help to Buy agent specifically in relation to your circumstance. All the best,

    Sophie
    HomeOwners Alliance

    Comment by Sophie Khan — March 6, 2017 @ 12:54 pm

  8. We have come to the end of the 5 years and we are now eligible to repay the builders and government loan. We were given a 30% loan through that method however this has since been sold on and interest alone is £75 a month without paying off any equity. This has not enabled us to pay off within the secondary 5 year window as recommended above. What recommendation is given with these circumstance changes?

    Comment by Matthew Holmes — March 3, 2017 @ 6:56 pm

  9. If I repay equity loan early, e.g. after 4 years, will be the amount recalculated as well? If house price will rise in these 4 years?

    Comment by Aurimas — November 22, 2016 @ 2:40 pm

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