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Help to Buy equity loan scheme explained

We talk you through everything you need to know about the Government's Help To Buy scheme, who is eligible, the possible pitfalls, how to apply and what to do when you have to repay the loan.

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.
  • The scheme is only available on new build properties valued under £600,000.
  • Open to all potential and existing homeowners – you don’t have to be a first-time buyer.
  • There is no salary cap or joint income limit applied.
  • It began on 1 April 2013 and will run until at least 2020.

screen shot of Treasury Help to Buy option 1

How does it work?

  • The Help to Buy equity loan is interest free for the first five years, after which you will be charged a rate of 1.75%. This rate slowly increases year on year in line with the Retail Price Index plus 1%. These repayments will be on top of 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 this interest rate.
  • Making part repayments, known as “staircasing”, will reduce your ongoing costs when the interest-free period ends. 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.
  • 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.
  • If house prices have risen since you first took out the Help to Buy loan then you will owe the Government more than the sum you originally borrowed. But if house prices have fallen, you will owe less.
  • Once you find a property which operates within the scheme you’ll need to find a mortgage lender. Not all lenders offer mortgages on Help to Buy homes. 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.

Can I get a mortgage to pay back the equity loan after five years?

  • After five years when the interest-free period ends, you could look at remortgaging with a high street bank or building society to pay off the Government loan through what is known as “staircasing.”
  • With staircasing, you are only allowed to pay off the loan in chunks of 10%. Once the value of the loan is below 20% you can only pay the remaining balance in one go and won’t be allowed to break it down into smaller amounts.
  • If you use a mortgage to pay off the equity loan you will only be able to borrow up to the amount that you still owe the Government and no more.
  • Before you pay back any of the equity loan in this way, the Government will require you to get an up-to-date valuation of the property, which you will need to pay for.
  • Don’t forget that the Government benefits from any house price gains as well as you.
  • There is also a £200 administration charge every time you make staircasing repayments to the Government.
  • If you would like to speak to a mortgage broker to discuss your options, you can talk to our partners at L&C Mortgages for fee-free advice.

Moving on

  • 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 a percentage stake in your property. So if you borrowed 20% as an equity loan from the Government and the value of your property increases you will now owe a larger amount. On the other hand if prices fall that 20% will be worth less than it was originally.
  • Take the example of a home worth £200,000 initially, which is bought with the help of a £40,000 Government loan (equivalent to 20% of the property’s starting value). If prices rise by 10%, the home would be worh £220,000 and you would have to pay the Government £44,000 when you come to sell. But if prices fell by 10% the home would be worth £180,000 and you would have to repay just £36,000 on sale.
  • We have a guide on selling your home bought with the Help to Buy equity loan, covering the steps involved, additional costs and other issues you need to be aware of before you sell.

 

Is the Help to Buy scheme right for me?

The HomeOwners Alliance welcomed 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 interest kicks in.
  • 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
  • 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 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.

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

 


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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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