If you’re a first-time buyer, you’re likely to be on the lookout for any assistance available to you. The government's Help to Buy scheme is one such avenue open to many FTBs, but how does Help to Buy work, exactly?
This guide to the popular equity loan scheme aims to answer that question and many more besides. First, though, let’s get to grips with the basics.
What is the Help to Buy scheme?
The government’s Help to Buy scheme is designed to help first-time buyers get a foot on the property ladder by allowing them to buy their first home with a mere 5% deposit.
Buyers can borrow 20% of the property’s price (or 40% if they live in London), interest-free for the first five years.
The scheme is set to run until the end of March 2023.
How does Help to Buy London differ?
The scheme is essentially the same, except Help to Buy London applicants will be granted a 40% loan, instead of 20%, to better reflect the higher prices Londoners have to pay for their property.
This means that those in the capital will only need a 55% mortgage on their new build home (the government's 40% plus the first-time buyer's 5% deposit making up the rest).
I hear that Help to Buy has changed…what’s new?
Two key differences came into play from April 2021: Regional price caps and a restriction on who can apply for a Help to Buy equity loan.
Now, only first-time buyers can apply to join the scheme, whereas previously anyone buying a new build home was eligible.
Can all first-time buyers apply for Help to Buy?
No, the Help to Buy equity loan scheme does not allow all first-time buyers. In order to be eligible for Help to Buy, you and anyone else you are buying the property with must:
- Not own residential land or property now or owned any in the past, either in the UK or abroad.
- Not have obtained any form of sharia mortgage finance.
The key area of confusion usually stems from first-time buyers who intend to buy with someone who has owned property in the past, be it a spouse, relative, or friend. This extends to property bought but never lived in, such as those purchased as an investment.
The reason for such strict rules are clear: Help to Buy is designed to assist those who need it most, so the eligibility criteria prioritises those who will reap the greatest benefit from it.
Although it may be tempting, it’s not worth even thinking about trying to game the system, as you will be asked to sign a legally binding declaration stating that you are indeed a genuine first-time buyer before a Help to Buy equity loan is granted.
See who qualifies as a first-time buyer for more information on what should be a relatively straightforward subject.
What are the regional price caps for the new Help to Buy (2021 to 2023)?
The introduction of regional price caps means that Help to Buy will only be granted on property that falls below the maximum property price stipulated by the government. All properties purchased with Help to Buy must cost no more than 1.5 times the relevant area’s first-time buyer property price.
Below is a list of the Help to Buy equity loan 2021 - 2023 price caps:
- London: £600, 000
- South East: £437, 600
- South West: £349, 000
- East of England: £407, 400
- East Midlands: £261, 900
- West Midlands: £255, 600
- North East: £186,100
- North West: £224,400
- Yorkshire: £228,100
How does Help to Buy work?
With all that out of the way, let’s get down to the nitty-gritty: how does Help to Buy work?
The basic premise is this: The government will lend first-time buyers money so they can buy a new-build home and get onto the property ladder. You, the first-time buyer, will only need to raise a 5% deposit and you can borrow 20% of the purchase price (or 40% if you’re in London). This loan is interest-free for five years.
From there, it’s down to you to secure the rest of the money you’ll need to buy the property (we’ll talk mortgage specifics in just a bit). This means a loan of 75% (property value minus your 5% deposit and the government’s 20%) or 55% if you’re based in the capital (property value minus your 5% deposit and the government’s 40%).
The equity loan from the Help to Buy scheme must be paid back in full after 25 years, or sooner if you happen to sell your property before that quarter of century elapses or your repayment mortgage has been settled.
Bear in mind that the repayment will be based on 20% of your home’s future sale price (40% in London), not what you paid for the property. This means that if the value of your home rises, so does the amount you’ll pay back to the government. The same applies should house prices drop. In this scenario, your equity loan repayment cost will fall as well.
What’s the difference between Help to Buy and Shared Ownership?
There are a few points that separate Help to Buy and Shared Ownership, but chief amongst them is this: Shared Ownership means you only own a portion of the property, whereas Help to Buy gives you legal ownership of 100% of your home.
You’ll often find that shared ownership homes are offered to market by housing associations. Help to Buy property, on the other hand, is commonly offered by housebuilders via estate agents such as ourselves.
Do you need a specific type of mortgage for Help to Buy?
Although most of the High Street lenders now have products on their books named after the scheme, there’s no stipulation that your mortgage has to be labelled as such. The only requirements in terms of mortgage specifics is that your loan be on a repayment basis. Interest only mortgages are not suitable for the Help to Buy scheme.
Tips for saving that all-important 5% deposit for Help to Buy
Our advice to first-time buyers looking to save a deposit for a Help to Buy equity loan is the same as we offer to everyone, so check out our guide to saving a property deposit after you’ve finished here.
Paying back your Help to Buy equity loan
If you are thinking of paying back your Help to Buy equity loan early, the good news is that you can. The option to pay off what you owe is open to you from the moment you complete your purchase.
How you choose to pay it back is up to you, and you don’t need to sell your home to clear the debt. Instead, you are allowed to remortgage the property to raise the necessary funds or pay the loan off if you can finance the repayment another way.
The amount you owe will be calculated based on the percentage amount you borrowed and the market value of the property in question. Bear in mind that the valuation would need to be conducted by an independent Royal Institute of Chartered Surveyors (RICS) surveyor, so there will be additional costs to consider.
Here’s the rub, though: The smallest amount you can pay back is 10% of the market value of your home, leaving you with a remaining equity loan of 10%. The thing is, you can only pay back in 10% increments, so for those with a 20% equity loan, it’s either a full or half repayment. Nothing else is on the table.
For those who have borrowed the full amount via Help to Buy London, i.e. 40%, you can choose to repay 10%, 20% or 30%.
Remember, too, that every time you decide to pay down your equity loan, be it in full or in part, you’ll need to get your home revalued in order to correctly assess the amount left outstanding on your loan. This process will need to be carried out by a RICS accredited surveyor, who you’ll need to pay.
What happens after the five year interest-free period?
As we’ve already stated here in this article, the Help to Buy equity loan is interest-free for the first five years. To take full advantage of this period, first-time buyers would be wise to pay off as much of the loan as they possibly can during this time.
Once the five year interest-free period is up, you will be liable to interest. This will begin at 1.75% of the outstanding balance of your loan during the sixth year and then rise annually every April by adding the Consumer Price Index (CPI) plus 2% to your underlying interest rate.
Confused? Here’s what your repayments would look like if you borrowed £60k on Help to Buy and the CPI remained steady at 1% for the first 10 years of your equity loan:
As we already know, there’s no interest to pay during the first five years, but you do still have to pay a management fee. Thankfully, however, this is a nominal £1 per month, so your annual repayments will be a mere £12 per year for the first five years.
Interest starts to kick in this year at an initial rate of 1.75%. This is a simple equation that looks like this:
£60,000 x 0.0175 (i.e. 1.75%) = £1,050
Don’t forget to add that management fee. So, in year six, you’ll repay a total of £1,062.
This is the point where things get a little confusing for many. To get your new interest rate for the year, we need to take your old rate (1.75%) and add 3% to it. This is because the CPI stands at 1% and the standardised interest rate rise applied to all Help to Buy equity loans is 2%.
1.75% x 3% (1.75 x 0.03) = 0.0525%
1.75% + 0.0525% = 1.8025%
With your new interest rate calculated, you can now apply that to your repayment calculation as follows:
£60,000 x 1.8% (0.018) = £1,080
£1,080 + £12 (management fee) = £1,092
Same equation applies here as it did in Year 7, as the CPI has remained steady at 1%:
1.8025% x 3% = 0.054075%
1.8025% + 0.054075% = 1.856575%
£60,000 x 1.86% (0.0186) = £1,116
£1,116 + £12 (management fee) = £1,128
1.856575% x 3% = 0.05569%
1.856575% + 0.05569% = 1.912265%
£60,000 x 1.91% (0.0191) = £1,146
£1,146 + £12 (management fee) = £1,158
1.912265% x 3% = 0.05736%
1.912265% + 0.05736% = 1.969625%
£60,000 x 1.97% (0.0197) = £1,182
£1,182 + £12 (management fee) = £1,194
What happens to the equity loan if house prices rise?
As we explained earlier, if house prices rise, so too will your equity loan repayment when the time comes to settle up. The opposite is also true: If the value of your home falls, your equity loan repayment will also drop.
What happens if you want to sell a Help to Buy property?
There are no rules stating that you cannot sell a property acquired under the Help to Buy scheme. You will, naturally, need to repay the money you owe on the equity loan, and the amount you’ll have to pay back will be calculated against a percentage of the price the property sold for. This will be 40% for Londoners, 20% for everyone else.
Can you remortgage a Help to Buy home?
In short, yes, you can remortgage a Help to Buy home. However, you won’t need to think about it for the first five years, as your equity loan will be interest-free and no mortgage deal is going to beat that!
That’s it for our guide to Help to Buy, we hope you’ve found it useful. As there’s so much information here, it’s a good idea to bookmark this page for future reference. Equally, if you know of others who are thinking of taking out a Help to Buy equity loan, do feel free to share this post with them.
If you are yet to find a suitable home, check out the latest new builds in London and Essex we have for sale here at Petty’s.
As a Director of Petty’s, there isn’t much Jenny doesn’t do: Lettings management, HR duties, general business admin...the list goes on! When she isn’t handling the day-to-day stuff, you’ll find her in the theatre or enjoying afternoon tea somewhere swanky.020 3370 8786 / Email Directly