Help to Buy
Help to Buy is a government backed scheme which aims to help first time buyers onto the property market. There are two Help to Buy products: Help to Buy Equity Loans (England only) and Help to Buy Mortgage Guarantees (UK-wide).
Help to Buy Equity Loans
The Help to Buy Equity Loan scheme is available to 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 being bought. The government provides an equity loan of up to 20%, the buyer funds a 5% deposit and a 75% mortgage makes up the rest. The scheme is only available for select new build properties in England and not the rest of the UK.
Help to Buy Equity Loans make getting onto the housing ladder more accessible by reducing the amount of deposit required when compared to buying a new build property on the open market. For example, buying a property valued at £250,000 on the open market would require a minimum deposit of £37,500 whilst under the Help to Buy scheme this reduces to just £12,500. Another benefit of the scheme is that the combination of the equity loan and the personal deposit enables a larger amount to be put down, which will generally enable the lender to offer a better mortgage rate.
In a typical transaction with a property worth £250,000 the Help to Buy Equity Loan scheme would break down like this:
- £50,000 Help to Buy Equity Loan (provided by the government)
- £12,500 purchaser deposit (paid from savings/family gift)
- £187,500 mortgage (from a lender that supports the scheme)
The Help to Buy Equity Loan is interest-free for the first 5 years and after that the purchaser pays an annual fee of 1.75% on the amount of the outstanding loan. The fee is paid monthly and will increase each year by inflation (Retail Price Index (RPI) + 1%.
The equity loan can be repaid in part or full after the property has been owned for a minimum of one year. This is subject to a minimum 10% of the property value being purchased at the time of repayment. Equally, there is no compulsion to repay the equity loan until the property is sold.
When the home is sold, the equity loan that is still outstanding is repaid from the sale proceeds. So, for example, if 80% of the property was originally bought (5% personal deposit & 75% mortgage) and the full equity loan (20%) was still outstanding, the amount of equity loan due for repayment would be 20% of the market value at the time the property is sold.
In practice, this means:
- If a 20% equity loan had been taken to buy a property worth £250,000 this would have originally been £50,000
- If the property is sold for £300,000, the equity loan due for repayment would have risen to £60,000 i.e. 20% of the sale price
- If the property had dropped in value, the equity loan would also drop in value. However, the full mortgage amount would still need to be repaid
To be eligible for Help to Buy Equity Loans:
- Purchasers under the scheme must be at least 18 years old
- There is no maximum household income level
- A minimum 5% deposit of the full purchase price is required
- A mortgage of at least 25% of the full purchase price must be taken out
- Existing home owners must have sold their current home before or at the point of completion on the Help to Buy home
- Existing property cannot be rented out to enable a purchase of a second home through Help to Buy
- Part Exchange is not available through this scheme
- It is not possible to sublet your Help to Buy home
- Proof that the mortgage repayments and other outgoings on the home being purchased are affordable is required. There is a standard Homes and Communities affordability calculator which will determine whether the property is sustainable long term
Help to Buy Mortgage Guarantee
The Help to Buy Mortgage Guarantee scheme can help with the purchase of either a newly built or an existing property anywhere in the UK.
The scheme works like this:
- A minimum personal deposit of 5% is required
- Up to 95% of the property’s price may be borrowed from a mortgage lender that supports the scheme
- The government will provide a guarantee to the lender for any mortgage borrowing above 80% of the property’s value
- The maximum purchase price is £600,000
- The scheme can’t be used in conjunction with shared ownership or shared equity purchases nor can it be used with any other publicly funded product
- The property can’t be a second home, nor can it be rented out after purchase
- The scheme is not restricted to first time buyers and there’s no limit on the level of income
The mortgage guarantee is provided to the lender, not the purchaser. For the purchaser, it is no different to any other mortgage with responsibility for repaying the whole loan and the prospect of repossession in the event of missed repayments.
For the lender, this will mean that lending to people with small deposits will carry much less risk, so it should create more choice for borrowers. However, the scheme provides lenders the freedom to set their own interest rates, so there are no guarantees they’ll offer a more attractive rate.