What is the help to buy scheme?
Launched in April 2021, the Help to Buy equity loan scheme is for first-time buyers and it includes regional property price limits to make sure the scheme reaches those people who need it the most. At the moment it is set to run until March 2023 and the government will lend homebuyers up to 20% of the cost of a newly built home
How does it work?
It is a loan from the government that you put towards the cost of buying a newly built home. You can borrow a minimum of 5% up to a maximum of 20% (40% in London) of the full purchase price of a new-build home.
The equity loan, the deposit that you have saved, and the repayment mortgage will cover the total cost of buying the home. You won’t pay any interest on the equity loan for the first 5 years, you only start to pay this in year 6 on the equity loan amount that you borrowed.
How long is the scheme running for?
The current scheme closes in March 2023
How do I pay back the loan?
For the first five years, the equity loan is interest-free and you only pay a monthly management fee of £1.
When you get to year 6, you will pay the £1 monthly management fee and pay a monthly interest fee of 1.75% of the equity loan. The interest rate will then rise each year in April with the Consumer Price Index (CPI), plus 2%. You continue to pay interest until you pay off your loan in full.
You must repay the equity loan in full at the end of the equity loan term, when you pay off your repayment mortgage, or when you sell your home. You must adhere to the terms set out in the contract otherwise you may have to pay it back in full at any time.
The amount you pay back is worked out as a percentage of the market value at the time you choose to repay.
What happens when you sell?
You must pay your equity loan off in full when you sell your home.
If the market value of your home rises, so does the amount you owe on your equity loan. And if the value of your home falls, the amount you owe on your equity loan falls too.
Who is it for?
The scheme is for first-time homebuyers over the age of 18 years who are buying a home in England.
What is the eligibility criteria?
You must be aged 18 or older and be a first-time homebuyer. You have to buy a new build home from a help to buy registered homebuilder.
- own a home or land anywhere in the world now or in the past
- have had any form of mortgage finance
- own a home bought with other people or inherited a home
- be married or in a cohabiting relationship, either now or on legal completion with anyone who owns or has owned a home or land anywhere in the world
- buy a second home
If you’re married or in a cohabiting relationship, you will have to make a joint application with your spouse or civil partner, and both live in the home and have it as your only residence.
There are price limits on homes you can buy with an equity loan. The limit is different for each region in England.
How do I apply?
There are a few steps in applying for the scheme:
- Reserve a new build property with a home builder who is registered with the scheme.
- Apply online through the help to buy agent in your region.
- The help to buy agent assesses your eligibility for the scheme and then they issue an authority to proceed if you are eligible.
- The ‘Authority to Proceed’ allows you to apply for a repayment mortgage and then progress your application through to exchange of contract, where the help to buy agent will then issue an ‘Authority to Exchange’.
- Then once all the paperwork and dates are agreed, and the home has been built, the help to buy agent will issue the ‘Transaction confirmation’, which allows legal completion and for the funds to be transferred to the homebuilder.
- Once legal completion occurs, the help to buy agent passes your details onto the equity loan administrator to manage the equity loan account until it is paid in full.
Is Help to buy the best loan, or are there better ones out there for first-time buyers
The useful thing about the equity loans is that they allow homebuyers to have a smaller mortgage without needing to save up a large deposit and interest won’t accrue on the equity loan for the first five years. This interest-free period removes the strain of repaying your loan at the same time as your mortgage. The early years of mortgage repayment can be tough as they might come just as your career is still developing or you are facing costs of raising a family, so this may give you some breathing space.
With the assistance of this scheme, you can access a relatively low loan to value mortgage and some more competitive deals than if you could only get a 95% mortgage.
If any, what are the negatives of the help-to-buy scheme?
Your loan is based on a percentage of your home’s value, so this can change as the housing market fluctuates. So, if your home goes up in value, then you will be required to pay more than the government initially loaned you.
Once the 5-year interest-free period ends, you will pay an additional 1.75% interest and then the rates will increase based on the RPI plus 1%. So, there is always a possibility that if interest rates increase, you will be repaying an unmanageable amount.
It is worth mentioning that help to buy mortgages are not offered by all lenders. Those lenders that do offer help to buy mortgages will vary mortgages from their standard mortgage products. This is because you are only one of three parties in your mortgage, which includes yourself, the government and your provider. Help to Buy can also potentially cause issues when you want to remortgage because a lot of remortgage deals are only available to those who have paid off their equity loan. However, more lenders are starting to offer remortgaging options for those with an outstanding equity loan on their property.
Do you think it’s a good scheme? Do you have any concerns about the scheme?
I do think that this is a good scheme, as it helps first-time buyers get a brand-new home with a small deposit.
My concerns are that the amount that you have to pay back is based on a percentage and not the original amount borrowed, which can be frustrating for my clients if their house has increased in value. However, they must think they probably wouldn’t have got the house in the first place without this government help and this also means their share has increased too! There are also admin charges to repay at each stage and the scheme also insists on an independent RICS valuation, which can be costly.
At KB Mortgage Services, we can help find you the best deal and save you money over the term of your mortgage.
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Note: Your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment to your existing lender if you remortgage. Second charge mortgages are arranged by introduction only.
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