What is Help to Buy?

Help to Buy Equity Loan – all you need to know!

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

Help to Buy provides eligible buyers with an an equity loan (also known as shared equity) of up to 20% of the value of a new build home. The government provides the 20% loan so the buyer only needs to raise a 5% deposit, with a 75% mortgage making up the rest.

 

Help to Buy in London

To reflect the higher property prices in the capital, the government increased the upper limit for the equity loan from 20% to 40% for buyers in London. With London Help to Buy, the government provides this 40% loan and the buyers will still only need to raise a 5% deposit, but with a 55% mortgage making up the rest.

 

Why buy a Help to Buy home? 

Help to Buy makes getting on to the housing ladder more accessible to some buyers by reducing the amount required for a deposit when compared to buying a property on the open market. Another benefit of the equity loan from the government is that with a larger amount to put down, the buyer will often be able to get a better mortgage rate from the lender.

 

What are the costs of a Help to Buy home?

If you wanted to buy a new build home worth £250,000, the Help to Buy Equity Loan would break down as follows:

  • £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 also interest-free for five years. After that, the purchaser pays an annual fee of 1.75% on the amount of the outstanding loan, however this 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 would 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, the owner will need to repay the percentage equity loan that is still outstanding. So, for example, if they originally bought 80% of the property and 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:

  • You take a 20% equity loan to buy a property worth £250,000, equating to £50,000.
  • When you sell the property, it’s worth £300,000.
  • You will repay £60,000 as this is 20% of the current value of your home, not the amount you borrowed.
  • In turn, if the property had dropped in value, you’d pay less than you borrowed.

 

Who is eligible for the Help to Buy equity loan?

The general eligibility criteria for Help to Buy is as follows:

  • You must be at least 18 years old.
  • You must be a first time buyer, meaning that you have never owned another property either in the UK or abroad. If you are purchasing a property with another person, you must both meet the definition of a first time buyer to benefit from the scheme.
  • You will require at least a 5% deposit of the full purchase price of the property.
  • While there are no minimum or maximum income brackets, you must be able to fund at least 80% (60% in London) of the purchase through a combination of deposit and mortgage.
  • The value of the property you’re purchasing can’t be over the regional price cap for your area – full list of price caps below.
  • 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.
  • Part Exchange is not available through the scheme.
  • You cannot sub-let your Help to Buy home.

 

Rules of buying a Help to Buy home

Help to Buy is only available on new build developments where Homes England have a registration agreement with the housebuilder. Both houses and apartments are available through the scheme, but the value of the property you’re purchasing can’t be over the specified regional price caps. The regional price caps for Help to Buy are as follows:

  • London: £600,000
  • South East: £437,600
  • East of England: £407,400
  • South West: £349,000
  • East Midlands: £261,900
  • West Midlands: £255,600
  • Yorkshire and the Humber: £228,100
  • North West: £224,400
  • North East: £186,100

 

What are the differences between Help to Buy and Shared Ownership?

There are significant differences between Help to Buy and Shared Ownership, but the key difference is that with Help to Buy, you purchase and legally own all of the property. In contrast, the Shared Ownership scheme allows buyers to purchase a share of a property (usually between 25-75%), paying a mortgage on the part they own and a subsidised rent to their provider on the rest; the buyer can then choose to go on to buy more shares through a process known as staircasing.

A key point to remember here is that the deposit you put down on a Help to Buy home will generally include a sizeable boost from the equity loan which makes up the difference between the mortgage and the purchase prices, while the deposit on a Shared Ownership property will be between 5-10% of the share you’re purchasing – not the full market value of the property.

Help to Buy is generally provided by housebuilders while Shared Ownership if offered by housing associations. However, there are numerous housing associations who also offer homes through the Help to Buy scheme.

To find out more about the differences between these two schemes, check out our Shared Ownership vs Help to Buy guide.

 

Want to find out more about Help to Buy or Shared Ownership? Visit our article index for informational features and blogs, or check out our helpful FAQs and guides. Alternatively, you can start your search for a new home on Share to Buy’s property portal today!