Help to Buy is a government equity loan scheme, the key advantage being that it can allow you to purchase a property with just 5% down as a deposit. Essentially this means that, under the scheme, part of your 95% mortgage is covered by the government, with interest only repayable after the first five years of owning the home.
Significant changes to the scheme were implemented on 1st April 2021, so just what were these changes, and what are the financial implications to first-time buyers?
What is Help To Buy?
Help to Buy is a government-based equity loan scheme whereby the government lends a homebuyer up to 20% of the value of their new build home (or 40% if the property purchase is in London). You can borrow a minimum of 5% of the full purchase price of a new-build home. You also must buy your home from a homebuilder registered for Help to Buy Equity Loan.
The amount you pay for a home depends on where you buy it. We discuss the maximum equity loan price caps from April 2021 to March 2023 further down this article.
This government share of the loan remains interest-free for the first five years of ownership, followed by an interest rate of 1.75% in year six, and an increase of 1% (plus inflation) annually thereafter. The previous form of this scheme closed on the 31st March 2021.
You can repay your equity loan (whether that’s all of it or just a portion of it) at any time. A part payment has to be a minimum of 10% of what your home is worth at the time of repayment. Here’s an example from the government Help to Buy site for a £200,000 property:
The Help to Buy ISA is a separate but related scheme that closed to any new applicants on 30th November 2019. If you already hold a Help to Buy ISA account, you can continue to make saving deposits into it until 2029. When you are ready to purchase a home (this can be at any time), the government will top up your savings (up to the value of £12,000) by 25%, meaning that you could receive a maximum of £3,000. You will only receive these funds upon completion of a property purchase, but it needn’t be a new build - you can use your ISA money to purchase any home
up to a value of £250,000 (or up to £450,000 in London).
Help To Buy 2021 changes
A new version of the Help to Buy ISA scheme came into effect on 1st April 2021 with some significant changes as follows:
- The new version of the scheme will only be available to first-time buyers - you will no longer be able to benefit from the scheme if you have previously owned a home.
- The value of new build homes eligible for purchase through the scheme will now be capped differently between regions. The London cap of £600,000 will remain the same, while other regions will see significantly lower caps - from £437,600 in the South East to £186,100 in the North East of England.
Regional price caps
Here is the full regional property price caps as listed by HM Treasury as of 2021:
- London - £600,000
- South East - £437,600
- South West - £349,000
- East of England - £407,400
- North East - £186,100
- North West - £224,400
- East Midlands - £261,900
- West Midlands - £255,600
- Yorkshire and the Humber - £228,100
Eligibility for the Help To Buy scheme
There are several important factors that make up the eligibility criteria for the Help to Buy scheme. They are as follows:
To be eligible for the Help to Buy scheme, you must be:
- 18 years or over
- A first-time property buyer
- Assessed as having the capacity to meet the fees and interest payments
You are not eligible for the equity loan scheme if you have ever:
You can apply as an individual or as a group, but all applicants must meet the scheme’s eligibility criteria. Whether you are married, cohabiting with your partner (and plan to continue doing so), or in a civil partnership, it is mandatory that you make a joint application.
The property you purchase through the scheme must be:
- A new-build
- Within the regional price cap threshold for your region (see above)
- The only home you both own and reside in
- Sold to you by a registered Help to Buy homebuilder
The home must not have previously been lived in by anyone before you purchase it, and you are not permitted to rent it out or sub-let it after buying it.
New Build London Property
2 bedrooms, 1 bathroom
South Birkbeck Road, Leyton, E11
£375,000 (Share of Freehold)
View property details!
How the Help To Buy Scheme works
You will need to:
- Put down a minimum deposit amount of 5% of the property’s purchase price
- Successfully apply for a repayment mortgage of at least 25% of the purchase price
You can then use the scheme to borrow an equity loan of between 5% and 20% of the purchase price of your new-build home. However, if the property is in London, the maximum you can borrow increases to 40%.
The percentage of equity loan that you borrow is used to calculate your equity loan and interest repayments.
You are not required to make interest repayments for the first five years. In the sixth year, however, you will be charged at an interest rate of 1.75%, applied to the original equity loan amount borrowed. This is an annual interest amount spread over 12 monthly payments.
The interest rate charged then increases in April of every year, by adding on the Consumer Price Index (CPI) plus 2%.
You can reduce the amount of interest you pay by making a partial repayment of the equity loan, thus decreasing the amount that the interest rate will be applied to.
What about fees?
A management fee of £1 is payable monthly until the loan is paid off in full. If you remortgage or change your equity loan in any way, administration fees will be applicable.
Other standard fees associated with purchasing a home will be applicable, such as mortgage arrangement fees, legal fees, market value report expenses, etc.
Repaying the equity loan
You can repay part or all of the equity loan at any stage. Your repayments are calculated using your percentage of equity loan, as well as the home’s market value at the time of making a repayment. To find out your home’s current market value, fill out a few simple details and get a price on the spot with our online property valuation tool.
The smallest repayment allowable is 10% of your home’s current market value. Repaying part of your loan will reduce the amount of your monthly interest payments applicable from the sixth year onwards.
Your equity loan must be paid off in full when you:
- Reach the end of the loan’s term (usually 25 years)
- Pay off your mortgage
- Sell the property
It may also be requested that you repay your equity loan in full should you fail to adhere to the terms and conditions.
If you sell the home, you will pay the equity loan percentage of the property’s market value, or the agreed price of sale if it is higher.
Advantages of the Help To Buy scheme
Low deposit criteria
The biggest advantage of this scheme, as with other government-incentivised property schemes, is the opportunity of purchasing a property with a smaller deposit, whilst still securing a more favourable mortgage rate than you otherwise would with a 95% mortgage.
Great for couples
The Help to Buy ISA is capped per person, not per household. This means that, if you are planning to purchase a property with your partner, you could both benefit when you are ready to buy, and potentially receive up to £6,000 extra towards a deposit.
Great for Londoners
Since you can borrow up to 40% of the total property value in London, this scheme is most advantageous for anyone wanting to settle in the capital. Not only would you need a lower deposit, but you’d only be applying for a mortgage based on 60% of the property price.
For example, say you want to buy a home in London for £400,000, you’d need to make a deposit of £20,000, and only apply for a mortgage of £220,000. This can be particularly helpful for Londoners on average salaries.
Related: Where to buy property in London in 2021
Disadvantages of the Help To Buy scheme
Limited to new builds
Buying a new-build can be similar to buying a brand new car - as soon as you’ve made the purchase it immediately decreases in value (thanks to developer/manufacturer profit margins). That said, there can be some potential to make a profit when buying off a plan. Assessing the house value predictions for the area in question will go a long way in determining the wisest purchase.
Increased expenses after five years
Larger repayments on top of your mortgage will kick in after the five-year interest-free period and you need to be prepared for this to avoid significant financial difficulties.
Interest-rate increase vulnerability
The interest charged after the first five years is subject to national interest rate changes and will not be a fixed rate. This could go either way of course, but again it’s important to go into it with your eyes open to all possibilities.
Get in touch with Portico Finance
This scheme is a fantastic opportunity for hopeful homebuyers but only you can ascertain if it is right for you. So long as you go into it armed with the full knowledge of how the scheme plays out, it can be your ticket to making the dream of owning your first home a reality.
If you are a first-time buyer looking to get onto the property ladder, view our wide range of London properties for sale, or give us a call on 020 7099 4000 to find out how we can help you in your search!
If you have any questions about the Help to Buy scheme or mortgages, you can also connect with our Portico Finance Mortgage Experts at firstname.lastname@example.org or on 07824 353803. We look forward to assisting you!