Explaining the Help to Buy Scheme

It’s become increasingly difficult for new home buyers to get onto the housing market in recent years.

Getting together that all-important deposit in the first place can be extremely challenging, especially in areas like London where the prices are higher than anywhere else.  Also being able to afford the home of your dreams can often seem a step too far.

The Help to Buy Scheme was introduced to provide assistance in putting together the 25% deposit often needed to successfully apply for a mortgage. Without it, many new homeowners simply wouldn’t be able to get on the market at all.

What is the Help to Buy Scheme?

It’s an equity loan for both first-time buyers and home movers who are purchasing a newly built property. You need to have already saved a 5% deposit for the property that you intend to buy in order to qualify. You cannot own or be financially linked to any other house and there is also an affordability calculator which you will need to pass to be approved.

The Government will provide a low-cost loan for up to 20% of the value of the property. If you live in London, this can be up to 40% of the purchase price, up to a maximum purchase price of £600,000

The loan scheme was set to run until 2021 but has been extended (for first-time buyers) to 2023. You cannot apply to the scheme if you are buying a second property or are purchasing a buy to let property.

How Does it Work?

·        You must have 5% of the selling price of the new property you intend to buy as a deposit.

·        You must pass the Help to Buy affordability check

·        The Government gives you the rest of the deposit as a low-interest loan and you then take out a repayment mortgage for the balance of the property price.

For example, if you are buying a home selling for £200,000, you would need to find £10,000 as your own deposit, you would get £40,000 from the Help to Buy Scheme, and you would take out a mortgage for £150,000 to cover the rest.

You need to repay the Help to Buy scheme loan within 25 years or when you sell the property. The amount you repay will be 20% of the value of the property when you sell it (40% if you are in London).

One important thing to remember is to apply for your Help-to-Buy loan before applying for your mortgage and get an approval to proceed from them. You don’t want to be in a position where you have a mortgage offer but can’t get the Help-to-Buy loan. Also make sure you consult a qualified independent financial advisor as not all mortgage providers are authorised to lend on Help-to-Buy purchases.

Repaying the Equity Loan

For the first five years of the loan, you do not pay any interest, but you will pay a monthly management fee of £1 per month. After that, you will begin paying 1.75% of the loan amount per year. Every year after, this will increase in line with the Retail Prices Index plus 1%. Please bear in mind that this is an interest repayment only and the capital loan is not being repaid so the amount owing is not reduced.

When you come to sell your property, you will be liable for the repayment of the loan plus a share of the profit or increase in value that has been made on it.

In other words, if your £200,000 home, on which you borrowed £40,000, increases in value to £250,000, you will be liable to re-pay, upon selling, £50,000

Conversely, if the price of your property falls then the amount you will repay also falls as you are only obliged to re-pay 20% of the sale price.

You have the option to pay back the equity loan at any time – the minimum that you can pay back is 10% of the value of your home. You can either decide to pay the fees and interest as well as the loan or just the fees and interest on their own until you sell the property.

How much deposit you will be able to put on your next home purchase (if you decide to move) will depend on how much the house price has increased, how much of the mortgage you have paid off and how much there is outstanding of the equity loan you have to repay.