The Help to Buy equity loan can hugely expand what you can afford – but it’s not for everyone and you’ll need a plan to pay it off. We explain how it works.
Of all the different schemes to get on the housing ladder, the Help to Buy equity loan is the most well-known and has helped hundreds of thousands of first-time buyers.
It involves the Government loaning you the money for 20% of your new home, or 40% if you’re in London.
That’s on top of your mortgage – meaning you can afford properties you’d never have been able to before and buy sooner.
Plus, you don’t have to make any repayments or interest payments on the Government loan for five years, leaving you with money for mortgage repayments and getting settled in.
As with other schemes, however, you need to meet a range of criteria and it’s not free money – after five years the interest payments kick in and rise steeply.
We’ve talked to David Blake, mortgage adviser at Which? Mortgage Advisers about when the Help to Buy loan can help, and when you’d be better off going elsewhere.
Can Help to Buy help me?
What and where you’re buying matters because Help to Buy loans can only be used on new properties valued up to £600,000.
Furthermore, these properties need to be built by Help-to-Buy registered builders (go to the help section of your local Help to Buy website for a full list).
If you or your partner currently own a property then you won’t be eligible, whilst if you’re buying in Wales, Scotland and Northern Ireland look out for similar schemes.
To work out what you can afford, start with your deposit: this must be worth at least 5% of the property’s value (read more about deposits and why they matter here).
A deposit of £20,000 can get you a property of £400,000 – but don’t forget about stamp duty, solicitors fees and other upfront costs you’ll need to pay.
Additionally, the accompanying mortgage can’t be worth more than 4.5 times your annual income (or your combined annual income, if buying with someone else).
In the case of the £400,000 property – for which you need a £320,000 mortgage (or £240,000 in London) - you’d need a combined income of £72,000 to qualify (£54,000 in London).
The drawbacks of Help to Buy
Even if you’re eligible for the Help to Buy scheme, it might not be the best option.
As Which? mortgage broker Daniel Blake explains: “if you can afford an 80% mortgage without the Help to Buy equity loan, then it may make more sense to proceed with your purchase without applying for the financial assistance.”
With Help to Buy, your choice of properties is severely restricted, and, like a car, new build properties can be disproportionally expensive.
The process of buying a new-build property, particularly if it’s ‘off-the-plan’ (still being built) is typically longer and more complicated then for an existing property.
Furthermore, Blake warns that “you may find that you are more restricted on your choice of mortgages”; lenders may demand a higher deposit for a mortgage for a new-build.
Blake notes, however, that because the mortgage is smaller you could get a mortgage with a cheaper interest rate.
Once you’re in your new-build property, your options are restricted: you can’t sublet the home and can’t own another property. If you own an apartment, you are likely to have to pay ground rent and a service charge alongside your mortgage and bills.
That’s all before you get to repayments.
Repaying Help to Buy loans
After five years, you begin paying interest on your Help to Buy loan.
This starts at 1.75% - still cheaper than many mortgages – but then increases by 1% plus the Retail Price Index (currently 2.3%) each year, quickly becoming unaffordable.
To avoid paying off this interest, you need to pay the Government back, either by re-mortgaging or by selling your home.
Unfortunately, as Which? broker Blake explains, “those who bought using the Help to Buy equity loan scheme are likely to have less choice when it comes to re-mortgaging.”
Many lenders are unwilling to re-mortgage your property if the value has dropped, or you want to keep part of the equity loan.
Rather then wait until the five years’ interest-free period has elapsed, see if your existing lender can re-mortgage you and consider talking to a broker about your options.
What to do next
To get a Help to Buy loan, start by finding a suitable property.
Then get a Property Information Form from the house builder, send it to your local Help to Buy organisation and reserve the home, which usually involves a fee.
Only after you’ve been approved by Help to Buy can you apply for your main mortgage, exchange contracts and move in.
If you’re not eligible for Help-to-Buy you may still be able to get a mortgage and may be able to get your parents to help with the cost.
Also have a look at the Shared Ownership scheme, which can help you buy new and existing properties with a very low deposit.
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