The previous Mortgage Guarantee scheme opened up a new range of 95 per cent mortgages, as most mortgages on the market at the moment – and certainly many of those with more attractive rates – are still restricted to a much lower loan-to-value threshold, such as 75 or 80 per cent lending.
With the Mortgage Guarantee scheme now at an end, we look at how many potential homebuyers can purchase a new property with a smaller deposit, thanks to the Help to Buy Equity Loan.
What is an Equity Loan?
The Help to Buy Equity Loan scheme is designed to allow those with a deposit of at least 5 per cent to take out a mortgage of up to 75 per cent of the purchase price. The government effectively tops up the difference of up to 20 per cent with an Equity Loan. That means that in exchange for giving you the loan to make up the purchase price, the government holds a percentage equity stake in the property.
Equity loans are open to both first-time buyers and home movers on new-build homes in England with a purchase price up to £600,000. The new purchase must be your only property. Although only available in England, equity schemes are also available in Scotland and Wales, and a similar co-ownership scheme exists for homebuyers in Northern Ireland.
Do I have to make payments to the Equity Loan?
The terms of the Equity Loan scheme mean that you don’t initially have to make any regular loan payments – just the payments to your mortgage. This arrangement applies for the first five years after buying your home, and within this period you won’t be charged any fees whatsoever on the Equity Loan.
In the sixth year, you will have to pay a fee equivalent to 1.75 per cent of the Equity Loan’s value. In subsequent years, the fee will increase at a rate based on the Retail Prices Index plus 1 per cent – so in effect the fee increases will be linked to inflation. Shortly before the fees start in the sixth year, your Help to Buy agent will get in touch to set up the monthly payments on your bank account. Note that the payments taken from your bank only go toward the fees that are charged, and do not count towards repaying the Equity Loan itself.
How do I repay the Equity Loan?
You have to repay the Equity Loan when you sell the property, or after 25 years – whichever comes first. The important thing to remember is that you will have to repay the equity percentage based on the property price at the time, which is likely to be different from the original amount borrowed.
Let’s say you took out a 20 per cent Equity Loan of £40,000 based on a purchase price of £200,000. If you sell the property after 10 years and the property value at that time has risen to £250,000, then you would have to repay £50,000 – 20 per cent of the market value of the property when it’s sold.
You can opt to repay all or part of the Equity Loan earlier. However, any single repayment toward the loan must be equivalent to at least 10 per cent of the market value of your property at the time you make the repayment.
How do I get an Equity Loan?
To buy a house with the help of an Equity Loan, you have to contact the Help to Buy agent for the area in which you want to purchase a property. Help to Buy agents are appointed by the government’s Homes and Communities Agency, and you can find details of your local agent online. Your agent will provide you with details of the property builders registered with the scheme, and help to guide you through the process.
Updated January 2017