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.
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 steadily increases year on year in line with any rise in 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.
- 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