Note: This guide explains the Help to Buy equity loan scheme offered on new homes, for more information on the Help to Buy mortgage guarantee scheme available on all properties under £600,000 please read our Help to Buy Mortgage Guarantee Scheme FAQs.
The Help to Buy scheme is aimed at helping prospective buyers with a small deposit buy a new build home.
If you have been struggling to stump up the cash for a deposit then this may be your salvation, we have a look at if the government's Help to Buy scheme really as good as it seems.
Here is what you need to know before you decide whether it is the right option for you.
What is Help to Buy?
The government Help to Buy scheme is designed to help people with a small deposit buy a new build home.
On a basic level it works like this:
you put down a deposit of at least 5% on a property worth less than £600,000
you get a government-backed Help to Buy equity loan worth up to 20% of the property price in England and up to 40% in London - this is interest free for the first 5 years.
you can buy your house with a mortgage of as little as 75%
As soon as your purchase is complete you will own 100% of your property - Help to Buy is not a shared equity scheme, at least not a conventional one.
Instead you will have a second charge placed on your home by your Help to Buy agency, in a similar way to taking out a secured loan. This means that your regional Help to Buy agent has a claim to part of the value of your home should you decide to sell.
So for example if you have a 20% Help to Buy equity loan and in 3 years' time sell your property for £200,000 the Help to Buy loan would be 20% off the sale price, or £40,000.
Who can get a Help to Buy equity loan?
Anyone over the age of 18 with a good credit history can use the Help to Buy scheme to buy a new property as long as they plan to live in it full time.
You do not need to be a first time buyer and there is no limit on the maximum amount you can earn either. The only restriction is that you must intend to live in the property and cannot own another home.
Previous schemes, like FirstBuy were only available to first time buyers with an income under £60,000.
Which properties qualify for the scheme?
Help to Buy equity loans are only available on new builds in England, buy you can use Help to Buy for new homes up to a maximum value of £600,000.
The Help to Buy loans are not available on ALL new build properties - developers need to register with their nearest Help to Buy agent before they can offer the scheme. This means you need to find out whether Help to Buy is available on your chosen property before you put down an offer.
Can you buy a property off-plan?
Yes, you can buy a property off-plan (before it is built) using the Help to Buy scheme.
You are able to reserve a new home that is off plan at any time. But you do need to complete the sale within six months of exchanging contracts.
If you are taking out a help to buy equity loan, you will generally be expected to have arranged a mortgage and exchanged contracts within one month of paying the reservation fee.
This is important because if you do decide to buy a property off-plan and want to make use of Help to Buy you will have to make sure your purchase fits in with these rules.
Remember, if you are buying a new home that is yet to be built you will also need to ensure that your mortgage offer remains valid until your legal completion date.
Can you use Help to Buy for a second home?
Unfortunately not; you cannot buy a second home with a Help to Buy equity loan.
This means you will not qualify for the Help to Buy scheme if you already own another property, if your name is on the deeds of another property (irrespective of whether you live there) or if you want to buy a new build as an investment or to rent out.
Older properties & the Help to Buy mortgage guarantee scheme
A second part of the Help to Buy scheme - Help to Buy mortgage guarantees - has been launched. This part of the scheme is focused on helping people buy pre-owned or newly built properties with a small deposit.
It is different to the current Help to Buy scheme and guarantees mortgages up to 95% rather than helping people on the ladder with interest free equity loans.
How much does Help to Buy cost?
Help to Buy equity loans are interest free for the first 5 years so you don't have to pay any interest during this time.
The only charge that you will have is a monthly £1 management fee which is paid from the start of the loan and until it is repaid.
At the start of the 6th year you will be charged a fee of 1.75% on your equity loan, this will be based on the market value of your home at the time of purchase rather than current value.
The fee will then increase each year by 1% + any increase in the RPI (retail prices index). If the RPI drops or stays the same your fee will still increase by 1% each year.
These fees are simply interest; they will not reduce the amount you own on your Help to Buy equity loan. Instead they contribute towards the cost of the running the scheme. This means that you will need to set aside the money to clear the balance in addition.
When do you need to repay the loan?
You will need to repay your Help to Buy equity loan in full when you sell your home.
The exact amount you will have to repay will depend on the market value of your property when you sell rather than the price you bought it for. This is because the Help to Buy loan is set as a percentage value of your property, rather than a fixed amount. So if your home has increased in value, you will have to repay more but if it has lost value you will repay less.
If you do not make any prior arrangements to repay your Help to Buy loan early and do not sell, the outstanding balance will be due for repayment after 25 years.
Again, the total you will have to repay will be dependent on the market value of the property at that time and the percentage of the equity loan you have outstanding.
You can make a part payment on your equity loan after you have owned your home for at least a year. If you do this you will need to pay back chunks of 10% or 20% of the total amount, but you will only be able to do this if the outstanding loan is worth at least 10% of the value of your property.
Does Help to Buy affect your mortgage?
The Help to Buy scheme boosts your deposit but you will still need to get a mortgage.
You will need to get a repayment mortgage, rather than an interest only deal but this is really a good thing because it will mean you are reducing your outstanding mortgage each time you make a repayment.
Your choice of lender will be somewhat restricted because you will only be able to borrow from mortgage companies that offer Help to Buy mortgages.
Despite this, you should be able to get an affordable mortgage because you will need to borrow less; this is one of the distinct advantages of the Help to Buy scheme.
Because you are borrowing less you will need a lower LTV mortgage and are more likely to qualify for a cheaper rate of interest as a result. All other things being equal you are also more likely to be granted a mortgage because by lowering the amount you need to borrow, you are less of a risk to the lender.
What if your circumstances change?
When you apply for the Help to Buy scheme your financial circumstances will be evaluated to ensure that you can afford the scheme and that you are a suitable candidate.
However, given that the Help to Buy equity loan could last anywhere up to 25 years it is quite possible that your circumstances might change during that time. Here's what you need to know:
What if I lose my job?
If your income falls you will still be expected to meet the financial commitments of Help to Buy.
You won't be able to claim Housing Benefit to cover Help to Buy fees as they are not classified as rent.
What if my partner leaves or someone else moves in?
Help to Buy is part of a legal agreement so any changes to the names on your Help to Buy policy will need to be agreed by everyone with an interest in your property.
To release someone from the agreement you will need permission from both the Post Sales HomeBuy Agent and your mortgage provider. You will then need to arrange a "Deed of Release" which will formally dissolve their involvement with the scheme.
Equally if you wish to add another person to your agreement you will need permission from your HomeBuy Agent and lender.
In both cases you will have to pay any necessary administration costs.
What if I die?
If you purchase your home by yourself then the property & Help to Buy equity loan will be passed to your chosen recipient as set out by the terms of your will. This will give your beneficiary or your estate the option to continue making payments in accordance with the scheme or to sell your home and repay the equity loan.
If you have not made a will then your property will pass under the laws of intestacy.
If you are a joint buyer then your interest in the property will pass either to your surviving co-owner or to another person if you choose a different beneficiary under the terms of your will.
Is Help to Buy right for you?
If you have a small deposit and want to purchase a new home Help to Buy is definitely worth further investigation.
Our guide Help to Buy - The Pros & Cons looks at the advantages and drawbacks of using the scheme to purchase a new home.
Before making your decision it's also worth considering the alternatives, our guides How to get a mortgage with no deposit and Should I Buy a House or Keep Renting? take a closer look at your options.
How long will Help to Buy last?
The scheme has been extended to last until at least 2020 at the moment.
However, there is no guarantee that it will last that long, if all the funding is used up before this date it may close early, so if you want to take advantage of Help to Buy itis best to act early.