Finding the initial deposit to buy a home is proving increasingly difficult for many people, particularly first-time buyers. In areas like London, the high cost of housing means buyers need to find substantial deposits before being able to apply for a mortgage.
The Government has provided a number of incentives to help buyers to purchase property, including the Help to Buy ISA. If you are considering buying a new build property, however, you can also access the Help to Buy equity loan.
What is the Help to Buy Equity Loan?
This is an equity scheme in the form of a low-interest loan and is open to people looking to buy a New Build Home, to help cover the initial deposit. There are, however, a set of criteria you will need to meet in order to be eligible.
· The property you intend to buy must be a new build and it needs to be bought from a registered Help to Buy builder.
· The maximum purchase price you can apply the loan to in England is £600,000 (£300,000 in Wales).
· This must be the only home you own. In other words, you cannot use the scheme to buy a second home or if you already have a mortgage.
· You cannot rent the property out or sub-let any part of it after purchase.
· If you are applying for the scheme in Wales, you need to show that you cannot afford the deposit for your home.
· You will need to provide the first 5% of the deposit yourself.
The equity loan is 20% of the value of the home (40% if you are buying in London). You will need to take out a mortgage of 75% of the value of the house. For example, for a £200,000 new build property you will pay £10,000 yourself (5% deposit). The scheme will then give you a loan for £40,000 (20% of the purchase price) taking the total deposit up to 25% and you will take out a mortgage of £150,000 for the remainder of the purchase price.
The loan percentage can be higher in London, where you can apply for up to 40% of the purchase price of the new build property.
There are some national variations when it comes to the Help to Buy equity loan. In Wales, for instance, the maximum house value you can apply for is £300,000. Both Scotland and Northern Ireland have their own schemes.
Paying Back the Loan
As this is a loan, you will need to pay it back. Either when the property is sold or within 25 years. Under the scheme, you pay nothing for the first 5 years. When you reach the sixth year, an annual fee of 1.75% is applied to the loan and you will arrange to pay this on a monthly basis with your provider. This does not go towards paying off the final loan, this is the interest payments for the loan. Be aware the 1.75% rate could increase annually in response to inflation.
The loan can either be repaid when you sell the property or before the end of 25 years (whichever happens first). You can decide to pay either part or all of the loan back at any time but the minimum payment you can make is 10% of the market value of your home at the time of the transaction.
Be mindful, when you come to sell the property, should the property value go up, i.e. you sell the property for more than what you paid for it, then the loan repayment will also increase. For example, let’s say that your property initially cost £200,000 and you had an equity loan of £40,000. When you come to sell the property, its value is set at £250,000. You would then need to make a total loan repayment of £50,000.
You need to be aware that these loan repayments are made on top of the mortgage agreement you will have taken out.