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!
Search our Guides and FAQs
What are shared equity / equity loans?arrow_downward
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?arrow_downward
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?arrow_downward
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?arrow_downward
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?arrow_downward
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?arrow_downward
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.