What is the Help to Buy Scheme and How Do I Apply?
Are you a first time home buyer? If yes, you might be eligible to apply for The Help to Buy Scheme – Equity Loan. Latest Deals is here to help you understand how this scheme works in England.
Who is eligible for The Help to Buy Scheme?
If you are a first time home buyer in England, aged 18 and over, and able to afford a mortgage, you are eligible for The Help to Buy Scheme.
It’s important to note that the property you buy with The Help to Buy Scheme needs to be a new-build, not have been lived in by anyone before you buy it and sold by a Help to Buy registered homebuilder.
Depending on the region you want to buy a property, the maximum property’s value you can buy with this scheme will change. Closer to London, the properties can be more expensive, and they can be a maximum of £600,000 in London. Check here to see all the property’s value you can buy with this scheme.
How does The Help to Buy Scheme work?
The Help to Buy Scheme works with a minimum deposit of 5% of the property’s value.
Then, you can borrow from the government from 5% to 20% of the property’s value. This can be up to 40% if you are buying in London.
Just like a mortgage, The Help to Buy Scheme also charges interest on the amount of money lent, but you do not have to pay it back for the first five years.
Then, in the 6th year, you will be charged interest at a rate of 1.75% based on the property’s value when you bought it. After that, every year, this rate will increase according to the Retail Prices Index inflation rate, plus 2%.
IMPORTANT NOTE: With The Help to Buy Scheme, you will need to pay a monthly management fee of £1. To get this government loan, you also need to have a repayment mortgage for the same duration of time.
What is an equity loan?
If you get an equity loan to buy a property, the lender owns part of the property according to the amount they have lent.
In The Help To Buy Scheme, the government has an equity share according to the percentage borrowed, up to 20% for England excluding London, and up to 40% for London.
The government has this equity share until you repay the equity loan.
IMPORTANT NOTE: This is very important if you decide to sell your property before repaying in full the equity loan. If you have bought a property for £200,000 and borrowed £40,000 (20%) from the government, if you sell for £250,000, you still need to give the government 20%, coming to £50,000.
How can I pay back my equity loan?
It’s important to note that the total amount you will pay back is linked to the property’s value at the time and not the amount you originally borrowed.
You can pay back your equity loan at any time. You can also pay part or all of the loan.
Every time you make a repayment, you need to get a market valuation report.
If you are paying back only part of your equity loan, the smallest amount you can pay is 10% of the property’s value at the time of the payment and after the market valuation report.
You can only pay back all your equity loan if you pay off your repayment mortgage, if you sell your property or if you have reached the end of the equity loan term, usually 25 years.
How to apply for The Help to Buy Scheme
- First, you need to find a new build property you’re interested in, with a homebuilder registered with the scheme. You can find a property here. Make sure you can afford the 5% down payment to narrow down your search. You will also need to pay a reservation fee of £500 to reserve your property.
- Then, you need to contact a Help to Buy agent in your region, you can find their contact information here. The agent will gather more information about you and the property you’re interested in, to see if you are eligible for the scheme. At this stage, you will need to fill in a Property Information Form.
- If you are eligible for the scheme and can afford it, your Help to Buy agent will issue an Authority to Proceed. This document allows you to apply for a mortgage.
- When your mortgage is approved, your Help to Buy agent will issue an Authority to Exchange. This document allows you to buy the property and to have it in your name. At this point, you will need to pay the deposit.
- Once all the paperwork is done, your Help to Buy agent will issue a Transaction Confirmation, when the funds from both the government and the bank or building society of your choice will be transferred to the homebuilder, paying for the property in full.
- Then, your Help to Buy agent will give your details to the equity loan administrator to manage your equity loan account until it’s paid in full.
IMPORTANT NOTE: With the Help To Buy Scheme, you have an equity loan with the government and a repayment mortgage with a bank or building society. You will need to pay back both of these.
During this process, you will need help from other professionals besides your Help to Buy agent. It’s essential to have a mortgage broker/adviser to get the best mortgage available to you and your case, and you will also need a conveyancer.
- Learn more about what a conveyancer does here.
- Learn more about how the Help to Buy Scheme - Equity Loan works here.
Is The Help to Buy Scheme right for you?
There are many advantages and to the Help to Buy Scheme, and you need to make sure you have the whole picture before apply for it:
|You are buying a new home that nobody has lived in before.||You can’t sublet your home.|
|You are going to pay only a 5% deposit.||You can only use certain homebuilders and lenders (banks and building societies).|
|Your equity loan is interest-free for the first five years.||When the property value increases, the equity loan also goes up.|
|You will have access to cheaper mortgage rates because you are getting at least a 75% mortgage.||Your interest fees will go up every year, making your equity loan more expensive every year, after the first five years.|
|You can pay off your equity loan in 10% chunks.||If you are planning to sell the property in a few years, you could end up in negative equity.|
|The government can change the terms and conditions of the scheme at any time.|