Help to Buy

Are you interested in getting onto the property ladder? If so, then it’s important to understand all the options available to you. You might not be aware that there are incentives in place that can help people purchase a home without needing to deal with the issues that make this process unaffordable for many.

These schemes are directed towards first-time buyers and that is certainly true for the Help to Buy Scheme. Let’s explore what this is and how it could benefit you.

What Is The Help To Buy Scheme?

Simply put, the Help to Buy scheme is designed to ensure that first-time buyers can afford to purchase a newly-built home. It is an equity loan and it is important that the purchase price for the property does not exceed the regional price cap for your area (further information below).

With this scheme, you will be able to borrow 20% of the purchase price without needing to worry about interest rates for the first five years. This will be the case if you have just five percent of the deposit. If you are purchasing a home in London, then you get an even greater benefit because you can borrow 40% of the purchase price.

However, this is to compensate for the fact that homes in London are considerably more expensive.

How Long Will The Help To Buy Scheme Be Available?

There were fears that the Help to Buy scheme would end in 2021. However, this notion has now been dispelled. The government has confirmed that the scheme will still be available through to at least 2023.

The new scheme is now accepting applications however legal completion may not take place until at least 1st April 2021.

All homebuyers under the scheme must now be first time buyers, where they could previously make use of the scheme to buy their next property if they were an existing homeowner.

Regional price caps have also been introduced, setting a maximum property purchase price to be eligible for the scheme.

Region	New price caps eligible for Help to Buy Scheme
North East	£186,100
North West	£224,400
Yorkshire & Humber	£228,100
East Midlands	261,900
West Midlands	£255,600
East of England	£407,600
London	£600,000
South East	£437,600
South West	£349,000

What Stops Me From Accessing The Scheme?

There are certain situations where you will not be able to access this scheme. For instance, you are not able to use it to purchase a second home or purchase a property that you are going to rent out. You also can only take out a repayment mortgage and you can’t buy a property for more than the price limits. As mentioned previously, you must now be a first time buyer to be eligible for the scheme.

It’s worth noting that these schemes do exist in the rest of the UK and are not exclusive to England. For instance, there is Help to Buy Scotland and Help to Buy Wales.

How Does The Equity Loan You Take Out Work?

The good news is that this scheme is relatively simple to understand. You do need 5% of the sale price for your new build house or flat. This will be your deposit. The government then loans you 20% or 40% depending on whether you live in London. The rest of the money is borrowed from a mortgage lender and this will be set up on a capital and interest mortgage.

However, you are also borrowing the amount from the government. This needs to be paid back after 25 years (or a further 10 years if the term is extended). If you sell the property then you need to pay it back earlier. Crucially, you have to pay the money back based on the home value when it sells. So, the home could increase in value which means that you would pay back significantly more than you borrowed from the government initially.

So, let’s say that you want to purchase a home that costs £400,000. You would save £20,000 which is your 5% deposit. You then borrow £80,000 in the 20% equity loan from the government and the other £300,000 is borrowed with your mortgage. That covers the remaining 75%.

Buying a £400k property	Amount	Percentage
Cash Deposit	£20,000	5%
Equity Loan	£80,000 (£160,000 in  London)	20% (40% in London)
Mortgage	£300,000 (£220,000 in London)	75% (55% in London)

What About Interest Rates?

As mentioned, interest rates for the equity loan provided by the government won’t come into effect until the sixth year. At this point, you’ll start to pay a 1.75% rate which will rise each year in line with the Consumer Price Index (CPI ) +2%.

It’s worth noting that the interest you pay on the equity part does not in any way reduce the amount outstanding and this will need to be paid separately on the sale of the property or using other means such as a re-mortgage etc. For instance, you might purchase a home for £400,000 but sell it for £500,000. This is an increase in the value of 25%. That means that the equity loan repayment is going to be £100,00 because you add on the 25% profit.

The good news is that you can use any profit you make on the sale to put towards your next home for the deposit. Remember, it’s likely by the time you sell you are going to have paid off quite a lot of the mortgage.

When Can You Pay Back Your Loan?

You can pay back your loan at any time. However, the minimum percentage you can pay back is 10% of the market value for your property. If you want to, you will be able to pay back the full value of the loan.

Finding An Equity Loan

So, how can you find an equity loan that is going to suit your needs and make your home purchase more affordable? Well, you can speak to a mortgage adviser. You can also think about looking for local developers in your area. It’s important that they are registered with Help to Buy. Otherwise, the new builds they are developing may not be eligible for this scheme. You should be able to find a Help to Buy agent in your local area to help you find the right option for you.

We hope this helps you to understand everything you need to know about the Help to Buy scheme and how it could benefit you if you are thinking about purchasing a newbuild property.