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Help to Buy Equity Loan Scheme: a helping hand with home ownership

29 Jul 2020
Help to Buy Equity Loan Scheme: a helping hand with home ownership

The Help to Buy Equity Loan Scheme was introduced by the government, to give first time buyers a helping hand to get on to the property ladder. It’s an increasingly popular way to buy a home with over 236,000 homes purchased using the scheme since its conception in 2013. However, it also adds a bit of complexity to the house buying process, so it’s something to look into carefully before deciding whether or not it’s helpful for you.

We’ll be focusing on the Help to Buy Equity Loan Scheme in England, but there are also similar schemes in Scotland and Wales, too.

What is a Help to buy equity loan? 

Launched back in 2013, the scheme looked to help people who were struggling to save for a deposit get on the property ladder.

The idea is, buyers will receive an equity loan of up to 20% of the value of the property they’re buying (up to 40% in London) in order to increase the amount they’re able to put down as a deposit.

The bigger the deposit, the better the mortgage rates that are available to buyers, and the Help to Buy loan is interest-free for the first five years. The loan also doesn’t need to be paid back until the property is sold, or the end of the mortgage term (up to 25 years) – whichever occurs soonest.

Who can use the help to buy equity loan scheme?

The scheme is for first time buyers, and also people who have owned homes previously but no longer own a property. Changes to the scheme mean that from 2021, only first time buyers will be eligible to apply.

Also, the loan can also be used on new build properties which are worth up to £600,000 and buyers need to already have a deposit of 5% saved before they’re eligible to apply.

How can the help to buy scheme help get you get on the property ladder?

You need a 5% deposit, up to 20% (40% in London) equity loan, and a mortgage to cover the rest.

If we’re looking at a London property costing the maximum amount of £600,000:

  • You would need a 5% deposit of £30,000
  • You could borrow up to 40% using the Help to Buy Equity Loan scheme £240,000
  • Then you would need to get a mortgage for £330,000

If you have more than 5% saved for your deposit – that’s great! The rules surrounding this are that you need at least 5% of a cash deposit, and you must take out a mortgage for at least 25% of the property’s value.

What else is there to bear in mind? 

They’re low cost at first, but you start paying interest on your equity loan after six years, which would mean an increase on monthly payments when added to your mortgage payments.

If you’re only able to save a small deposit, although they’re harder to come by there may still be mortgage options such as 95% mortgages available to you. It’s worth exploring all of your available options before going for it.

The government will have a stake in your home. If you’re borrowing using the Help to Buy scheme, the government will own whatever percentage of your home that you borrow. This means that if your home has increased in value when you come to sell it, you will owe the government more than you borrowed in the first place.

Using our example from above, if you borrowed 40% on a £600,000 home. (£240,000) and you came to sell it a few years later for £650,000, you would owe them 40% of £650,000 (£260,000).

How to apply

For more information about applying for the scheme, visit the government website here. 

The Help to Buy equity loan scheme does add another layer of complexity to home ownership, but it’s also a fantastic opportunity for those struggling to save a significant deposit, to get on the ladder.

If you’re looking to take advantage of the scheme in West London, get in touch with us – we’d love to help you find your dream new build.