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25/01/21

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Buying

What is the new Help to Buy Equity Loan scheme?

If you’re a first-time buyer looking to purchase your first home in Bristol, you might be considering the Help to Buy equity loan scheme.

The latest Help to Buy scheme is now open for applications and those buying properties through it will be able to move into their new homes from April.

But what are Help to Buy equity loans and how does the new scheme differ from the previous ones?

All the answers are here…

What is a Help to Buy equity loan?

Help to Buy equity loans are part of the government’s Help to Buy scheme, which was first introduced in 2013.

Equity loans see the government loan first-time buyers 20% of their deposit, with the buyers paying 5% towards the cost of a new-build home.

The other 75% is made up of a repayment mortgage.

Help to Buy equity loan interest rates

Help to Buy equity loans are interest-free for the first five years, with buyers paying 1.75% interest on the outstanding amount in year six.

From year seven, the interest rate rises by the Consumer Price Index plus 2% each year.

Paying back your equity loan

Your equity loan term is 25 years, and your loan must be paid back by the end of that term.

The interest you pay doesn’t go towards paying off the loan and your equity loan must be paid back if you sell your home at any time.

Because your equity loan amount follows the value of your property through the years, you could end up paying back more, or less, than you originally borrowed – depending on whether your property increases or decreases in value. For example:

• You buy a property costing £300,000 with a 20% equity loan of £60,000

• You decide to sell, but your property has increased in value and is now worth £320,000

• The equity loan figure you pay back is 20% of that new valuation, so you would pay back £64,000

You can also pay back your equity loan without selling, and before the end of the term, which is known as ‘staircasing’.

You can only pay back a minimum of 10%, however, and the amount you pay back is again based on the value of your home at the time of repayment.

How the new Help to Buy scheme works

The latest version of the Help to Buy equity loan scheme opened for applications in December.

Unlike the previous version of the scheme, the latest Help to Buy equity loans are now only available to first-time buyers.

The previous scheme also had a price cap of £600,000, whereas the new scheme works on a regional price cap basis.

Here in the South West, the maximum purchase price for first-time buyers using Help to Buy is £349,000.

All other aspects of Help to Buy remain the same.

Who is eligible for the new Help to Buy scheme?

Only first-time buyers can use Help to Buy to purchase a property and the scheme is only available for new-build properties in England.

To be classed as a first-time buyer and be eligible for the scheme, you must:

• Have never owned a property in the UK or abroad before

• Both be classed as first-time buyers if you’re buying with someone else

Help to buy equity loan pros and cons

As with any kind of property loan, there are pros and cons you should consider before deciding if Help to Buy is right for you.

Pros of Help to Buy

• You only need to save a 5% deposit, meaning you may be able to buy a home sooner

• Your property’s loan-to-value will be 75% through Help to Buy, meaning you may be able to access more affordable mortgage rates

• The equity loan is interest-free for five years, meaning it’s cheaper than a mortgage over the short term

• You can pay off the loan at any time with no penalties

Cons of Help to Buy

• You could end up paying back more if your home increases in value

• You’ll have to pay interest from year six and that interest rate increases each year thereafter

• Not all mortgage lenders offer Help to Buy mortgages

• Help to Buy is restricted to new-build properties only