Help to Buy

Help to Buy is a government backed scheme which aims to help first time buyers onto the property market.

Help to Buy equity loans give buyers who want to purchase a new build home with the help of an equity loan (also known as shared equity) of up to 20% of the value of the home you are buying.  The government provides the loan of up to 20% (40% in London), so the buyer needs only a 5% deposit, and a 75% (55% in London) mortgage to make up the rest.

Help to Buy Equity Loans make getting on to the housing ladder more accessible to some by reducing the amount required for a deposit when compared to buying a property on the open market. Another benefit of a Help to Buy Equity Loan from the government is that with a larger amount to put down, the buyer will hopefully get a better mortgage rate from the lender.

So, if you wanted to buy a property worth £250,000 the Help to Buy Equity Loan would break down like this:

  • £50,000 loan from the government
  • £12,500 deposit put down by you
  • £187,500 mortgage from a mortgage lender

The Help to Buy Equity Loan is interest-free for 5 years. After that, the purchaser pays an annual fee of 1.75% on the amount of the outstanding loan. The fee will increase each year by inflation (Retail Price Index (RPI) + 1%.

The purchaser can start repaying the equity loan after they’ve owned the home for a year, but they’ll need to be able to pay a minimum of 10% of the property value at the time of repayment.

When they want to sell their home, they’ll need to repay the percentage equity loan that isstill outstanding. So, for example, if they originally bought 80% of the property and they hadn’t repaid any of the equity loan, their repayment on selling would be 20% of the market value at the time when they sell.

In practice, this means:

  • If you take a 20% equity loan to buy a property worth £250,000, or £50,000;
  • When you sell the property, it’s worth £300,000;
  • You repay £60,000 – this is 20% of the new value of your home, not the amount you borrowed;
  • If the property had dropped in value, you’d pay less than you borrowed.

Who is eligible for Help to Buy Equity Loans?

To be eligible for Help to Buy Equity Loans:

  • You must be at least 18 years old
  • There is no maximum household income level
  • You will require at least a 5% deposit of the full purchase price
  • You must take out a mortgage which will need to be for 25% or more of the full purchase price
  • If a home owner already you must have sold your current home before or at the point of completion on your Help to Buy home
  • You cannot rent out your existing property to buy a second home through Help to Buy
  • Part Exchange is not available through this scheme
  • You cannot sublet your Help to Buy home
  • You cannot buy a home on sale for more than £600,000
  • You must be able to prove you can afford the mortgage repayments and other outgoings on the home you wish to buy. There is a standard Homes and Communities affordability calculator which will determine whether the property is sustainable long term
  • The difference between Help to Buy Equity Loans and Shared Ownership

There are significant differences between Help to Buy Equity Loans and Shared Ownership, but generally, with Help to Buy Equity Loans you purchase ALL of a property and legally own ALL the property. However, the key point is that the deposit you put down includes a generally sizable equity loan making up the difference between the mortgage and purchase price (i.e. to a large extent, this shared equity loan is your deposit).

In contrast, Shared Ownership schemes are usually undertaken whereby you only own a specific share as a lease on a Shared Ownership property (normally owned by a housing association), and you can only achieve 100% ownership by ‘staircasing’ up from shares of 25%+ to full ownership.

Help to Buy is generally provided by housebuilders and Shared Ownership by housing associations, but there are some housing associations with allocations for the Help to buy equity loan scheme.

What are shared equity / equity loans?
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Shared equity schemes give you a loan that acts as part of the deposit on a property. You will still need to take out a mortgage on the remainder of the property price, but because the loan counts towards your deposit you may be able to take out a mortgage where you might otherwise struggle.

Legally, you own 100% of the property.

In the short term, shared equity can mean you’ll be able to buy a house without paying a big deposit, although in the long term it could work out as a more expensive way of buying a home.

There is no interest charged on the equity loan in the first five years, but after that you pay a fee on the loan of 1.75%, rising each year by the retail price index (RPI) plus 1%.

After 25 years you will need to pay back the loan in full. As it is an ‘equity loan’, it is proportionate to the property value rather than being a fixed figure. Because of this, the amount you will have to repay will depend on the value of your property at the time.

There have been a number of Government backed shared equity schemes in the past (Firstbuy, Homebuy Direct), and the current Government backed equity loan scheme is called Help to Buy.

How do I apply for a Help to Buy equity loan?
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To apply for a Help to Buy equity loan you must contact the Help to Buy agent in your area. You must buy your home from a registered Help to Buy builder, and your local Help to Buy agent should have a list of registered builders for you to choose from.

Can I sell my Help to Buy home?
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Yes, the home will be in your name, which means you can sell it at any time. You’ll have to pay back the equity loan when you sell your home or at the end of your mortgage period – whichever comes first.

What is the interest charge on a Help to Buy equity loan?
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The Help to Buy equity loan is interest-free for 5 years. After that, you pay an annual fee of 1.75% on the amount of the outstanding loan. The fee will increase each year by inflation (Retail Price Index (RPI)) + 1%.

When do I pay back the equity loan?
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You’ll have to pay back the Help to Buy equity loan when you sell your home or at the end of your mortgage period – whichever comes first.

You can also pay back some of your equity loan without selling your home. You can pay back either 10% or 20% or the total amount, so long as the loan is worth at least 10% of the value of your home.

What is the difference between Shared Ownership and Help to Buy?
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There are significant differences between Help to Buy Equity Loans and shared ownership, but generally, with Help to Buy Equity Loans you purchase ALL of a property and legally own ALL the property. However, the key point is that the deposit you put down includes a generally sizable equity loan making up the difference between the mortgage and purchase price (i.e. to a large extent, this shared equity loan is your deposit).

In contrast, shared ownership schemes are usually undertaken whereby you only own a specific share as a lease on a shared ownership property (normally owned by a housing association), and you can only achieve 100% ownership by ‘staircasing’ up from shares of 25%+ to full ownership.

Help to Buy is generally provided by private developers and shared ownership by housing associations, but there are some housing associations with allocations for the Help to buy equity loan scheme.