A Help to Buy: Equity Loan could be appropriate if you feel confident that you can successfully manage a mortgage, yet you are unable to find an affordable property, or you are having trouble finding the large deposit that so many lenders require today.
The scheme described below is only available to those buying a new build property in England.
To qualify for a Help to Buy: Equity Loan, you do not have to be a first-time buyer – you could be an existing homeowner who wants to move. As long as the property you are hoping to purchase is newly built and costs no more than £600,000 and you can provide a deposit of at least 5% of the purchase price.
To satisfy the eligibility criteria, you are unable to sublet this property or enter a part exchange deal on your old property. And you are unable to own another property of any type (including buy to let properties or a holiday home) at the time you purchase your new home in this way.
How does it work?
If you are eligible, Home England (a Government agency) could lend you up to 20% (40% for home-buyers within Greater London) of the total price of a newly built home which means that your deposit could work out at just 5%. With the Help to Buy: Equity Loan being interest-free for the first five years it can be a very attractive scheme.
You will pay a small, monthly management fee of £1 from the start of the loan until it is repaid and, if you haven’t repaid the equity loan before the end of the first five years, you will then also be required to pay interest, charged on the amount that you have borrowed.
This starts at 1.75% of the loan and rises each year by any growth in the Retail Prices Index plus 1%.
The loan will need to be repaid in full after 25 years or when you sell your property; whichever occurs first. You may repay part of the loan early by making voluntary repayments of at least 10% of the prevailing property value.
When it comes to paying the loan back, the amount you pay depends on the market value of the loan and not the exact amount of cash you initially borrowed.
The following example shows how a Help to Buy: Equity Loan can work:
You purchase a new build property priced at £500,000. You have paid a 5% deposit of £25,000, the government has given you a loan of 40% (£200,000 in this case) and the remaining 55% (£275,000) has been borrowed from a commercial lender.
When you come to sell your home, its value has risen to £550,000.
You would repay £220,000 to Homes England - 40% of the value of the property. You would receive £330,000 (60%) which, after repaying the ‘main mortgage’, would leave you £55,0000 (less any fees and costs), from your mortgage and the deposit.
If, however the value of your home has fallen you will pay less than you borrowed.
The scheme was first introduced in 2013 and our advice has helped many of our clients access the scheme and secure their first home. It is currently due to continue until 2021. A new scheme is planned to run from 2021 to 2023 which will also provide loans of up to 20% (or 40% for London) that will only be available to First Time Buyers, and it is expected that the maximum qualifying purchase price will be lower. There are no plans to extend the scheme after 2023.
A HELP TO BUY EQUITY LOAN IS A LOAN SECURED AGAINST YOUR HOME.