A guide to the Help to Buy: Equity Loan scheme

Over 270,000 homes have been bought with Help to Buy Equity Loans since the scheme was launched in 2013. Let’s look at how the scheme can help you own your own property.

Over 270,000 homes have been bought with Help to Buy Equity Loans since the scheme was launched in 2013. Let’s look at how the scheme can help you own your own property.

Tobi Owens
From the Mortgages team
5
minute read
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Posted 17 DECEMBER 2020

What is the Help to Buy scheme?

There are two Help to Buy schemes, set up by the government, that help people to get on, or move up, the property ladder. They are:

  • Help to Buy: Equity Loan – a loan to help you buy a new-build home in England. There are similar schemes if you live in Scotland, Wales or Northern Ireland.
  • Help to Buy: Shared Ownership – this gives you the chance to buy a share of your home (between 25% and 75% of the value of the property) and pay rent on the remaining portion.

How does Help to Buy: Equity Loan work?

With a Help to Buy Equity Loan, the government lends you up to 20% of the value of a newly built home (up to 40% in Greater London), up to a maximum purchase price of £600,000. To qualify, you’ll need to have saved a deposit of 5% of the property’s value. You’ll borrow the rest (75%) from a mortgage lender.

For example, to buy a home in England priced at £200,000:

Source of funds Percentage to pay Amount (£)
Your deposit 5% £10,000
Government equity loan 20%

£40,000

Mortgage loan 75% £150,000
TOTAL   £200,000

 

To buy a home in London priced at £400,000:

Source of funds Percentage to pay Amount (£)
Your deposit 5%

£20,000

Government equity loan 40% £160,000
Mortgage loan 55% £220,000
TOTAL   £400,000

 

The Help to Buy scheme works slightly differently in other areas of the UK:

  • In Scotland – first-time buyers and existing homeowners can get support through the Help to Buy (Scotland) Affordable New Build scheme, which can help with up to 15% of the purchase price of a new build. The maximum threshold is £200,000.
  • In Wales – the Help to Buy scheme applies to homes valued up to £300,000.
  • In Northern Ireland – there are a range of different schemes to help first-time buyers.

How do the interest charges on the Help to Buy: Equity Loan scheme work?

For the first five years you won’t need to pay any interest on the equity loan. After that, you’ll be charged as follows:

The first five years:

  • the government equity loan is interest-free
  • you’ll pay a £1 monthly management fee for the first five years, which will continue from year six onwards

From year six:

  • you start to pay interest at 1.75%

From year seven:

  • the 1.75% rate increases each year by the Retail Price Index, plus 1%

The interest you pay on your Help to Buy loan doesn’t go towards paying off the government equity loan – so the amount owing on that doesn’t reduce.

How can I pay back the equity loan so I can own my home 100%?

If you want to stay in your home and reduce the equity share that the government owns, you can make part repayments of the government share at any time. The minimum amount you can repay is 10% and this is always based on the current market value of your home – not the original price. Essentially, this means the government will take a share of the profit (or loss) each time you pay back some or all of the equity loan. The minimum voluntary repayment is 10% of the market value at the time of repayment.

If you are considering remortgaging and you have a government equity loan, whether you are increasing the amount you own or not, it’s best to take expert mortgage advice as the sums can get quite complicated.

What if I want to sell my home?

When you come to sell your property (or when the mortgage is paid off), you’ll have to repay the government the same proportion of the home’s value you borrowed in the first place.

For example:

  • you buy your home for £200,000
  • your government equity loan is 20% (£40,000)
  • you sell your home for £300,000
  • you pay back 20% of the equity loan based on the value of your home when you sell it (£60,000)
  • you will have £40,000 you can use as a deposit for your next home

Who isn’t eligible for the scheme?

A Help to Buy: Equity Loan won’t be available to you if:

  • you’re buying a new home in addition to one you already own
  • you’re looking to buy a property that you intend to rent out.

You’ll only be able to benefit from the Help to Buy scheme if you take out a repayment mortgage. With a repayment mortgage, you pay monthly repayments for an agreed period of time (known as the term) until you’ve paid back the amount you borrowed (the capital), plus interest.

Are there any changes to the Help to Buy scheme during coronavirus?

In response to concerns about delays due to the coronavirus pandemic, the government has made some changes to the scheme’s deadlines.

The existing legal completion date for Help to Buy homebuyers remains as 31 March 2021.

However, the deadline for builders to finish Help to Buy homes has been extended from 31 December 2020 to 28 February 2021.

You can still apply for the current scheme as long as your builder has the property ready for you to move into by 28 February 2021. To make sure you get the equity loan funds, the whole legal process of the purchase must be complete by 31 March 2021.

Homebuyers who reserved their purchase by 30 June 2020 and have experienced severe delays due to the COVID-19 pandemic will be given more time to complete. In this case, your builder must be able to finish your home so it is ready to move into by 30 April 2021. To make sure you get the equity loan funds, the whole legal process must be complete, and you must have the keys to move into your new home, by 31 May 2021.

If you reserved your home after 1 July 2020, the purchase must be complete and your home ready to move into by 31 March 2021.

Find out more about Help to Buy during COVID-19, on the government’s website.

Will there be future Help to Buy schemes?

The government is planning a new Help to Buy scheme that will only be available to first-time buyers. The new Equity Loan scheme is due to be launched next spring.

It will be available from April 2021 for two years and will end in March 2023.

More information can be found on the government’s Help to Buy website.

How do I apply for the Help to Buy scheme?

You can start by speaking with a Help to Buy agent in your local area, or a developer who’s registered with the Help to Buy scheme.

Find out more about the Help to Buy: Equity Loan or the Shared Ownership scheme on the government’s website. 

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