What the Help to Buy Scheme?
The Help to Buy Scheme, which was introduced by the Government in 2013, provides a number of tools to help prospective buyers to purchase a new-build property, including:
- Help to Buy ISA
- Shared Ownership, and;
- Equity loans
Up to now, the equity loan scheme has been open to both existing homeowners and first-time buyers, but as of 1st April, it will only be open to the latter.
How does the Help to Buy equity loan scheme work?
Under the Help to Buy equity loans scheme, the Government loans money to the purchaser in return for an equity share of the property. These loans are up to 20% of the value of the property (or 40% in London) and are interest-free for a period of five years. In order to qualify for the Help to Buy equity loan scheme, buyers need at least a five percent deposit. As such, the total price of the house purchase is funded by a combination of the purchaser’s own deposit, the Government back loan, and a mortgage.
As an example, a house with a value of £200,000 would be purchased with:
- A deposit from the purchaser of £10,000 (5% of the purchase price);
- An equity loan of £40,000 (20% of the purchase price), and;
- A mortgage of £150,000 (75% of the purchase price)
Purchasers also need to ensure they take into account the reservation fee for their new build home (typically around £500), in addition to the cost of any legal fees and stamp duty.
Announcing the updated Scheme on 3rd March 2021, Rishi Sunak stated that he wanted to turn “generation rent” into “generation buy”.
New regional caps on house purchases
Under the new version of the Help to Buy Scheme from 1st April 2021, regional caps on the purchase price will come into force. This will limit the amount which purchasers can spend on a property if they are using the Government-backed Scheme. These caps are as follows (in ascending order):
- North East: £186,100
- North West: £224,400
- Yorkshire: £228,100
- East Midlands: £261,900
- West Midlands: £255,600
- South West: £349,000
- East of England: £407,400
- South East: £437,600
- London: £600,000
How are repayments made on the equity loan?
For the first five years, no equity loan repayments whatsoever are required (you will still need to pay your mortgage during this time). From the start of year six, borrowers using the Help to Buy Scheme are required to start making payments, but only on the interest owed. This means you will not be reducing the balance of the loan. The interest rate starts at 1.75% of the equity loan, however, this increases each April with inflation (by the Consumer Price Index (CPI) plus 2%). There is also a monthly management fee of £1.
You will only be required to pay off the loan once the term ends (typically 25 years), when your mortgage is paid in full, or if/when you sell your property. It is important to note that the amount owed under your equity loan will increase if your property goes up in value or will decrease if your property goes down in value.
You can pay off the loan sooner if you wish. The Help to Buy equity loan rules state you can pay off your equity loan in full or by making part payments at any time. There is one proviso, however, the first repayment amount must be at least 10% of the value of your property at the time. This differs from a traditional loan, as what you are doing is effectively buying back a 10% portion of the equity in your property from the Government, a process referred to as ‘stair-casing’. When making a payment, you will need to have your home valued and also pay an administration fee of £200.
While the Help to Buy Scheme won’t be the right option for all first-time buyers, it offers an excellent way for those who would otherwise not be able to buy to get on the housing ladder. Anyone considering using the Help to Buy Scheme should take the time to understand its’ advantages and disadvantages and the conditions which will apply if they proceed. If you are unsure if the Scheme is right for you and your family, speak to a property Solicitor who will be able to explain the advantages, disadvantages, and implications for your family.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have a highly experienced property law team who can assist you with all matters relating to conveyancing and the Government’s Help to Buy Scheme. To make an appointment, please call us on 01932 840 111.