What is Help to Buy?
Help to Buy is a Government scheme introduced to help prospective home buyers realise their dream of owning their own home. It was introduced to help those who can pay a mortgage but are struggling to purchase a property, find a property they can afford, or save the large deposit mortgage lenders require. The good news for people in this situation is that the Government has extended the scheme through to 2023. Naturally rules apply to ensure only those who require assistance can use the scheme, and that they can afford it. In this article we explain:
- how Help to Buy works,
- how much you can borrow,
- who is eligible and what restrictions exist, and
- how repayments work.
How Help to Buy works
The Help to Buy scheme appears complicated at first, but we’ll do our best to break it down! Under the scheme, the Government lends eligible prospective home buyers up to 20% of the purchase price of a newly-built property. The property can be worth up to £600,000, and buyers must have at least 5% deposit. The 20% loan is interest-free for the first five years. To reflect the more competitive market, buyers in London can borrow up to 40% of the property price. The rest of the value can be borrowed from a mortgage lender.
Let’s take an example!
Imagine you want to buy a newly-built home worth £300,000.
You could be eligible for a Help to Buy loan of up to £60,000 (20% of the house price).
With only a £15,000 deposit (5% of the house price).
Meaning that you would require a £225,000 mortgage, which is a very standard 75% LTV (loan-to-value).
All fairly straightforward, right!? Now, let’s cover the restrictions which are in place.
Help to Buy restrictions
There are restrictions to try to ensure the scheme is only available to those who can afford it and require the help. They cover who is eligible, the value of the property, the size of deposit and the loan.
Who is eligible?
- The scheme is currently open to both first time buyers and existing home owners. However, from April 2021 Help to Buy equity will only be available for first time buyers. This is to ensure the scheme is used as it is intended to be, by people who really need it. Before April 2021, homeowners can reserve a new build property using Help to Buy as long as their existing property is sold before they complete on the new property.
- Help to Buy is only available in England. However, Scottish and Welsh governments and the Northern Ireland Housing Executive run similar schemes.
- There is no maximum household income.
- You must be 75 years of age or younger.
How much can I borrow?
- You can purchase a property with a price up to £600,000.
- You need to provide a deposit of minimum 5%.
- Help to Buy equity can be borrowed up to 20% of the property’s value outside London. Up to 40% can be borrowed within Greater London. These percentages are valid until April 2021. From May 2021 there will be new regional price caps to attempt to reduce the maximum price of homes eligible.
What property can I buy?
- The Help to Buy scheme is restricted to those purchasing new-build homes on developments that are participating in the scheme. Many of the developments listed on HomeViews participate in the scheme, so we’re a great place to start researching!
How do Help to Buy repayments work?
There are no charges on the Help to Buy equity loan for the first 5 years. This is important, as most new homeowners are strapped for cash. However, voluntary part repayments can be made at any time. It’s a good idea to pay off the loan as soon as you’re able. After 5 years you will pay annual fees on the loan to encourage you to pay back what you can, as soon as you are able. In year 6 you’ll be charged 1.75% of the equity loan. Each year following the fee will rise based on the Retail Prices Index (put together by the Office for National Statistics) plus 1% each year. The equity loan must be paid back in full after 25 years, or earlier if you sell your home.
Here’s a summary of the charges:
- Years 1-5: no fees
- Year 6: 1.75% of the equity loan
- Year 7 onwards: 1.75% + Retail Prices Index + 1%
It’s important to note that these fees do not go towards paying off your Help to Buy equity loan. They’re just loan fees. When you sell your home or pay off your mortgage in full, you will need to repay the loan itself. The repayment will include interest based on any increase in value of your property.
Let’s revisit our example!
In the above example you bought your newly-built home for £300,000;
Imagine you sell it for £360,000, that’s an increase in value of 20%;
Your equity loan repayment would be £72,000 (£60,000 original loan + 20% profit);
Your mortgage repayment would be the £225,000 you borrowed (with any repayments you made deducted from this);
…so your share would be at least £63,000.
How much your share is depends on the property price change and how much of your mortgage you’ve paid off.
It’s important to consider and prepare for costs associated with home buying other than your deposit, mortgage and equity loan. Significant other costs include solicitor fees and stamp duty. We advise you to consult an independent financial advisor if you have any questions about the affordability of a property.