What is the Help to Buy scheme and how does it work? Laura Foster, residential property solicitor, explains more about the process and what is involved.
The new Help to Buy Equity Loan Scheme was launched on 1 April 2021 and will run until March 2023. Homes and Communities Agency (trading as Homes England) is a government agency funded by the Department for Levelling Up, Housing and Communities, and the Scheme will help first time buyers into homeownership in England.
You must be over the age of 18 and a first time buyer, intending to reside at the property as your main residence, having never owned a legal interest in a residential property anywhere in the world. If you are married or co-habiting, you must both qualify as first time buyers and a joint application will need to be made.
To be eligible you must not have had any form of Sharia mortgage which is a mortgage meeting requirements Sharia (Islamic) law.
The property being purchased must be a new build property from a Help to Buy registered homebuilder and note that properties split into flats do not count as new builds under the Scheme.
Your contribution must be at least a 5% cash deposit at exchange of contracts and you will need to arrange a standard mortgage on a repayment basis for at least 25% of the purchase price. Homes and Communities Agency will lend you up to 20% of the purchase price or 40% if the property is located in London.
How the Scheme works
The equity loan is interest free for 5 years and you will be required to pay a £1 monthly management fee. From year 6, you will be charged a monthly interest of 1.75% in addition to the £1 monthly management fee and you will continue to pay interest until the loan has been repaid in full.
In April each year, the interest rate will rise based on the rate of inflation at the time according to the Consumer Price Index, plus 2%. If the rate of inflation is 0% or less, the interest rate will rise by 2%.
The equity loan must be repaid in full when you pay off your repayment mortgage, sell your home or reach the end of the loan terms, which is normally 25 years. Should you wish to make any part payments on top of the monthly interest payments, you must repay at least 10% of the market value of your property at the time.
You may not be aware that there are set maximum purchase price limits on homes you can buy with the Help to Buy Scheme, depending on the region. Pease ensure you check these limits before applying as you cannot utilise the Help to Buy Equity Loan Scheme to buy a property over these bandings:-
- North East - £186,100
- North West - £224,400
- Yorkshire and The Humber - £228,100
- East Midlands - £261,900
- West Midlands - £255,600
- East of England - £407,400
- London - £600,000
- South East - £437,600
- South West - £349,000
If you are unsure about the specific region of a property you are looking to purchase, I would suggest you check with a local Help to Buy Agent who should be able to supply you with specific information on the property.
The equity loan amount is not fixed and when you come to sell your property, the amount repayable to Homes and Communities Agency is equivalent to the percentage of the initial loan. For example, if you received a loan of 20% of the purchase price of your home, you must then repay 20% of the proceeds when you sell, as the loan is based on the percentage of your home’s value. This means that if your property value rises, the amount due back to the Help to Buy Equity Loan Scheme also rises.
The equity loan is secured against your title deeds in the same way as a repayment mortgage is and in effect you will be taking out two separate mortgages and two separate loan agreements. You must keep up with the repayments for both loans otherwise you will be at great risk of losing your home.
You will need to find a mortgage provider who is participating in the Scheme as not all mortgage lenders for the repayment loan will offer Help to Buy mortgages. This may limit your options in terms of mortgage loan products and rates available to you.
The Help to Buy Equity Loan Scheme will certainly help first time buyers in getting on the property ladder but in order to determine whether the Scheme is right for you, we would strongly recommend you seek advice from a financial advisor. A Help to Buy agent will also be able to guide you through the options available but please note the equity loan is still be subject to lending criteria and affordability checks.