Help to Buy Overview
At its core, Help to Buy is equity loan assistance for home buyers from Homes England. For anyone thinking of buying through the scheme or whether they’re eligible here’s a Help to Buy Overview with some of the key areas to consider.
Help to Buy has been available in England since 2013, delivered by companies registered to offer the scheme. Since November 2015, the initiative has been extended to 2021 (or earlier if the funding is taken up).
The scheme is designed to make new build homes and apartments available to all home buyers, not just first-time buyers. It’s ideal for those who want a new home but might be constrained by the initial financial requirements such as a deposit.
There are two main types of Help to Buy, the first is Help to Buy: Shared Ownership and the second is Help to Buy: Equity Loan.
While Shared Ownership has similar benefits to the Equity Loan method, Shared Ownership involves purchasing a stake of the property and paying rent on the remaining amount, with the option of increasing your stake in the future.
The Equity Loan method is slightly different and requires a smaller deposit from the buyer, usually a minimum of 5%. The deposit is then topped up by a government ‘equity loan’ of up to 20% of the total property value. The remaining amount (in this example, 75%) is paid by your mortgage.
Both have their advantages and disadvantages yet for the purpose of this overview we’ll be covering the equity loan scheme.
Help to Buy: Equity Loan Overview
With Help to Buy, the buyer will purchase a new home with assistance from an equity loan provided by Homes England. Depending on where you’re buying, the rules differ slightly.
For Help to Buy in England, excluding London, the first step is to take out a mortgage that is at least 25% of the value of the property. This mortgage, along with the buyer’s personal contribution, must be a minimum of 80% of the total purchase price (the maximum of which is £600,000).
For Help to Buy in London, the mortgage must still be at least 25% of the total value of the property but the minimum combined contribution is reduced to a minimum of 60% of the purchase price. Again, the maximum full purchase price remains at £600,000.
In both cases, the buyer cash deposit contribution must be a minimum of 5% of the full purchase price. Once this is in place, Homes England provide an equity loan to make up to the rest of the purchase price – up to a maximum of 20% (or 40% if you’re buying in London).
The loan has to be repaid after 25 years (or earlier if you sell). You also have to pay the same percentage of the sales proceeds as an initial loan. For example, if you received a loan for 20% of the purchase price, you have to pay 20% of the future sale – which could be a marked difference if your home increases or decreases in value.
From the start of the loan being received, a £1 monthly management fee is also required for Homes England. After the first five years, there’s an additional fee of 1.75% as interest, which rises each year mirroring the Retail Price Index plus 1%. It should be noted that the management and interest fees do not count as repayment and won’t reduce the amount owning.
As with any other mortgage product, approval is needed from a Help to Buy agent. Each buyer will need to apply and be assessed before continuing with the Help to Buy process.
How Does It Work
Homes England is entitled to a share of your future sale price via a second charge on your home. This is done in the way that your mortgage lender will secure lending through a first charge. If you buy through Help to Buy, you will have a mortgage for less than the full purchase price of the property but you will be the legal owner with 100% title to your home.
The table below shows how it works at a basic level. In the example, the buyer has purchased a property worth £200,000 with a deposit of £10,000 and a mortgage worth £150,000. The contribution from Homes England totals £40,000, 20% of the total purchase price. If the property is sold, Homes England will be entitled to 20% of the total sale price.
You must pay back your equity loan within 25 years (or when your mortgage term ends, if it less than 25 years) or when you sell your home, whichever is sooner. There are no penalties for early repayment of your equity loan. You cannot transfer an existing loan to a new property.
Following your purchase, you can choose at any time to make a voluntary early repayment of the loan, provided the repayment is at least 10% of the market value of the property at the time of payment.
Because Help to Buy assistance comes in the form of an equity loan, the amount to increase your equity share or make repayments will differ based on the total value of the property at the time. The amount you pay will increase if the property value increases and decrease if the property loses value.
Who Can Take Part in Help to Buy
Help to Buy is open to all buyers, provided they pay a minimum 5% deposit contribution, take out the mortgage with a qualified lender and pass the Help to Buy assessment.
The assessment is designed to ensure that the buyer is in a position to afford a mortgage while also protecting the investment in the Help to Buy home. Buyers cannot use the scheme if the mortgage required is 4.5 times their household income.
The property purchased through Help to Buy must be your only residence. Help to Buy is not available for BTL investors or those who own any other type of property.
You also can’t rent out a home and buy a second through Help to Buy – any property that is brought through the scheme must be the primary living residence.
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