A Help to Buy equity loan is a loan from the government which you can combine with a deposit and a mortgage to buy a new-build property.
The loan is interest-free for the first five years.
The government launched the Help to Buy scheme on April 1st 2013 to make it easier for first-time buyers with small deposits to buy their first property, and to help existing homeowners to move house.
The scheme has been extended up to 2023.
With a Help to Buy loan, you can borrow up to 20% of the value of the property.
This means that you could buy a home with just a 5% deposit, and a mortgage for the remaining 75%.
In London, the rules are different and you can borrow up to 40%.
Who is Eligible for the Help to Buy Equity Loan?
At present, all potential and existing homeowners are eligible, as long as:
- • the property is a new build
- • the property is valued under the set price cap (currently £600,000)
- • you have a deposit of at least 5%
- • you intend to live in the property most of the time
- • you are not planning to let the property out or use it as a second home
There are however upcoming changes to the eligibility rules to be aware of.
On April 1st 2021, the scheme is being restricted to first-time buyers only and new regional price caps will be introduced.
These changes mean that anyone who already owns a property and hopes to benefit from a Help to Buy equity loan will need to do so before April 2021.
How Does the Help to Buy Equity Loan Work?
It is important to understand exactly how the loan works.
You borrow a percentage of your home’s value, not a fixed amount, so if your home increases in value so does the amount that you owe - the same is also true if the value falls.
You don't pay a penny in interest on the loan for the first five years (although you have to pay a £12 management fee each year until the interest kicks in).
From year six you start to pay interest at 1.75%, but only on the original loan amount.
For example, if you borrow £20,000 but owe £25,000 at the end because the property price goes up, interest is only charged on the original £20,000.
The interest rate increases every year after that at the RPI (Retail Prices Index) measure of inflation, plus 1% until the loan is paid off.
You will need to repay your equity loan in full after 25 years, when your mortgage term finishes or when you sell your home – whichever happens first.
As the loan is for a percentage of the property price rather than a set cash value, you will repay the market value of the loan at the time, rather than the amount you originally borrowed.
You can also choose to repay part of the loan early in chunks of either 10% or 20% of the total property value.
What are the advantages of the Help to Buy Equity Loan?
If you want to move house but cannot quite afford the deposit, the government's Help to Buy scheme could make a big difference.
Some of the advantages to the scheme are:
- • You get help getting your foot on the property ladder more quickly as you only need to save a 5% deposit
- • You get to borrow interest free as you do not pay any interest on your loan during the first five years
- • You get access to cheaper mortgage rates than if you simply went for a standard 95% mortgage
- • You can get a competitive loan rate (after five years) as the initial rate of interest (1.75% in the sixth year) is quite generous in the current market
What are the Disadvantages of the Help to Buy Equity Loan?
Although Help to Buy may give you the opportunity to purchase a new build home that you may not otherwise be able to afford, there are some potential drawbacks to carefully consider such as:
- • Your loan will become more and more expensive as the interest rate applied to your loan, after the initial 5 year interest free period, will increase each year
- • Your loan is not fixed, it will fluctuate with the market value of your property because it is percentage based
- • You can only buy new build properties and new build properties depreciate, in the same way that a brand-new car does
- • You can only borrow from certain lenders as not all providers offer Help to Buy mortgages
- • You could face the danger of negative equity as some property experts claim that the Help to Buy scheme has inflated house prices
- • You do not know if the terms might change as a future government could change the terms of the scheme at any point
Is the Help to Buy Equity Loan for Me?
If you’re interested in buying a new-build property, a Help to Buy equity loan is certainly worth considering.
However, if you've been struggling to save for years it can be easy to get carried away by the amount on offer through Help to Buy.
It is vital that you think carefully about how you'll pay the loan back or afford the interest payments five years down the line.
You should also consider the possible difficulties of remortgaging with a Help to Buy equity loan.
When remortgaging a Help to Buy deal, the outstanding equity loan owed to the government could be an issue.
There are currently a few lenders offering Help to Buy remortgaging products but some will only allow you to remortgage if you pay off the full equity loan when you do so.
If you would like to discuss your mortgage options get in touch with us to arrange a consultation.
Liked this article? Try reading:
A Step by Step Guide to the Home Buying Process
Disclaimer: Mortgages for Yacht Crew does not provide advice in relation to savings and investments. This article is intended for discussion only and does not propose financial advice in any way, and therefore should not be construed as such. Your property may be repossessed if you do not keep up with mortgage repayments.