Introduced in 2013, the Help to Buy Equity Loan was designed to help those with smaller deposits get onto the property ladder. Just over 158,000 properties have been purchased using the scheme since 2013, and it is due to end in 2023.
What is a Help to Buy Equity Loan?
The Help to Buy Equity Loan scheme is part of the Help to Buy support provided by the government, which includes ISAs, Shared Ownership schemes etc.
The Equity Loan is designed to help you get on the ladder with a 5% mortgage, giving you a 20% loan (or 40% in London) to bridge the gap between your deposit and your mortgage.
This means that the government has a stake in the property, which will need to be paid back.
The system is designed to address the difficulty of saving for a deposit, especially with house prices continuing to grow beyond wages – by supporting first time buyers in the gap between deposit and mortgage, more people can get on the ladder.
Who can use the scheme?
When the scheme first started, it was open to both first time buyers and home movers. This will continue to be the case up until April 2021, when it will only be available to first time buyers until the scheme finishes in 2023. The deadline for non first time buyers to reserve a property and use the scheme is 15th December 2020.
The scheme only exists in England, though there are similar schemes in Scotland and Wales and a co-ownership in Northern Ireland.
Most importantly, help to buy is only available on new build homes, and only through specific developers. Not all new build homes will be available for the help to buy equity loan.
How do I pay back the equity loan?
The equity loan is interest free for the first 5 years, you just pay a £1 per month account fee. During that time, ideally, you will be saving up to pay off the loan before you need to pay interest. You will just pay your mortgage – no interest on the loan or paying back of the loan itself.
In the sixth year, you start to pay interest – this is equivalent to 1.75% of the loan’s value. The fee will then increase year on year, based on the Retail Prices Index, plus 1%. This means they are linked to inflation, and that they will continue to grow year on year.
How do I repay the Equity Loan?
You have a choice when your 5 years end – you can start paying off the interest (arrange this with your Help to Buy agent) monthly, you can remortgage and consolidate your loan into your mortgage (there are not many options for this currently) or you can sell your property.
The Equity Loan amount itself is not paid off per month – it must be paid in a lump sum. You can pay off either half of the amount you borrowed, or the whole 20% loan.
You must pay the loan back either when the property is sold, or within 25 years of living in the property. For most people, paying off the loan when they sell their home is easiest.
It’s important to remember that because it’s a percentage of the property, you may be paying back a different price. If your property has increased in value, you’ll be paying back a lot more.
For example, if you bought a house worth £200,000, you would have taken out an equity loan of £40,000. When you sell the property, it is now worth £250,000, so 20% of market value would be £50,000.
If you wish to repay the loan without selling it, you would need to get a Help to Buy valuation to assess the price of your property, and the value of the loan would be worked out accordingly. You can then only pay back either 50% of the loan, or the whole lump sum.
How do I get an Equity Loan?
If you find a new build property that’s available through Help to Buy, you can talk to the developer. You will then want to talk to a Help to Buy agent in your area to discuss buying the 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.
What can I afford?
Whilst the 20% will go a long way towards helping you meet the difference between your 5% deposit and your mortgage, you’ll still have to consider whether you can meet the mortgage payments and whether you will qualify for the mortgage amount.
New build properties are often more expensive than existing properties, because they are brand new and often come with mod cons. It may be tempting to buy a more expensive property because the equity loan allows you to, but always think about your monthly mortgage payments, and how you’ll pay back the equity loan.
As of autumn 2018, there are now maximum price caps regionally on Help to Buy homes – they are being set at 1.5 times the average forecast first time buyer price in an area. Comparatively, the maximum price in the South East is £437,600, whilst in the North East it is £186,000.
What about in London?
In London you can borrow 40% instead of 25%, to make up the difference in prices in the capital. Similarly, the aforementioned regional price cap means that Help to Buy properties cannot cost more than £600,000.
What are the advantages?
- The Help to Buy Equity scheme has highlighted and sought to solve one of the biggest problems for first time buyers – saving a big enough deposit. With some first time buyers having excellent credit scores, well paid jobs and otherwise satisfying every requirement for a mortgage, it’s still possible that saving a large deposit would take years.
- Allowing you to use a 5% deposit gets you on the ladder sooner. The equity loan is interest free for 5 years, which hopefully can be used to save towards the loan, or to pay for remortgaging, or give you a head start on the interest payments.
- You can buy a high spec new build home as part of the scheme, making it more affordable than saving for years to buy a pre-existing home.
What are the disadvantages?
- New build properties are more expensive – our data shows the average new build a first time buyer chooses is 16% more than the second hand property they would buy. There is also evidence that first time buyers spend 8% more when using the Help to Buy Equity Loan. This could be down to choosing more expensive homes because the loan allows them, rather than buying a smaller place without the loan.
- However, if you’re buying at a premium, and your property doesn’t increase in the way you hope it does, you could find yourself dealing with negative equity. When you sell the property, you need to pay 20% back to the government, no matter what. After that is paid, along with the conveyancing and valuation fees, you may find you don’t have much left for a deposit for your next property.
- You may also struggle to sell the property on, as other first time buyers might prefer to buy a property using the equity loan scheme, rather than buying ‘second hand’ from you.
- There are limited options for remortaging when your 5 years is up. There are a few more options now, and hopefully more lenders will offer them, but few are keen to allow you to consolidate the equity loan into your mortgage.
- Whilst it’s easy to say you’ll use those first 5 interest-free years to save, it seems unlikely that you’ll manage to save up the loan amount in order to pay it off – especially if the property increases in value during that time.
- Being only able to pay off either half the amount or the full amount makes you more willing to simply put it off, pay the interest and wait until you sell. Also, don’t underestimate your monthly mortgage payments – if you’ve stretched for a more expensive property because the loan will allow you to, you may find each month is a stretch.
How do I know if it’s right for me?
It would be easy to consider the Help to Buy Equity scheme the answer to your dreams, especially if you’ve been saving for years without getting much closer to your deposit goal. Whilst it does offer a simpler way to own a property with a smaller deposit, you need to think long term. How do you plan to deal with the interest? When will you pay back the loan? Do you intend for this to be your long term family home, or simply a step on the ladder until you reach the 5 years, and then sell?
Making decisions about what you want from your home will allow you to make best use of the Help to Buy Equity Loan Scheme.
Update: As of August 2019, people using the Help to Buy Equity Scheme will be able to apply for 35 year mortgages. Up until now, they were not able to apply for mortgages longer than 25 years.
Updated August 2019